When purchasing property in Israel, many buyers need to take out a mortgage from an Israeli lending institution. There is a wide range of mortgage options offered by the various lending institutions, and it is important to understand the options in order to select the loan that best fits your financial profile. The following is a description of the most common mortgage options available.
Linked to the Prime Rate
One of the common options is to set up payments linked to the Bank of Israel’s prime rate. Payments vary throughout the life of the mortgage as the prime rate fluctuates. The maximum mortgage period is 30 years.
Linked to the Madad (cost of living index)
At the end of each month your outstanding principle is adjusted to reflect the cost of living index. Typically the cost of living index increases by 2% a year – which implies that your outstanding principle and your payments will increase in a similar proportion. While this can be the most tempting option because of the inexpensive up-front payments, in the long run, the overall cost of the loan can be significantly higher than a mortgage linked to the prime rate.
Foreign Exchange Mortgages
This is a mortgage in a foreign currency such as Dollars, Sterling, Euro, Swiss Franc or Japanese Yen.The interest rate is based on the LIBOR (London InterBank Offered Rate) of that currency plus a fixed premium. Many homeowners choose a foreign currency mortgage that parallels the currency in which they are earning their income in order to ‘hedge’ themselves against currency fluctuations. For example: A US Dollar income earner might choose a US Dollar mortgage in order to avoid the impact of a depreciating US Dollar. Other homeowners choose foreign currency mortgages because of more competitive interest rates. Taking out a loan in a currency other than the currency of one’s income involves exposure to currency risk and should only be undertaken in consultation with a qualified professional.
Until recently, loans in Israel were linked to variable rates. Within the last year, some lending institutions have begun offering fixed rate loans for a maximum period of 20 years. Although these mortgages guarantee the payment for the duration of the loan, they can sometimes have significant penalties in the event that the mortgage holder prepays the mortgage.
Understanding the terms and conditions of each loan product offered by Israeli banks is essential to ensure that you are getting the option that best suits your financial needs. Small differences in rates and terms can have a comparatively large effect on the overall cost of borrowing. It is best to compare a few loan options and negotiate with the banks on the rates and terms before deciding on any loan.
This guest post was written by Mortgage Israel Ltd. The content presented here represents information and opinions of the guest writer and not Nefesh B’Nefesh.