If you are planning on making Aliyah and buying a home in Israel, it is important to consider when to take out the mortgage – either before or after making Aliyah. There are advantages and disadvantages to each option, below are a few of the main points to consider:
Taking a Mortgage Prior to Making Aliyah
Advantages
- Ability to take the entire mortgage without a potential pre-payment penalty from most of the banks in Israel.
- Ability to take the entirety of the loan in a variable/floating interest rate, whose initial rates can be significantly lower than fixed rates as it is a riskier mortgage product (for a complete list of current mortgage rates click here).
- Banks generally require borrowers to obtain a life insurance policy from an Israeli insurer, to cover the amount being borrowed, and have the policy assigned to the mortgage bank. Non-Israeli citizens have an easier time obtaining a waiver on this requirement, which can be costly compared to similar policies offered abroad.
Disadvantages
- The mortgage is limited to 50% LTV (loan-to-value). However, it is possible to obtain an additional 10% in the form of an unsecured loan (at higher rates and a shorter term), subject to borrower qualification.
- The purchase tax for non-Israeli residents, which is currently much higher than for Olim or Israeli residents buying their first property, would be charged. However, assuming the borrower makes Aliyah within 1 year of the purchase, a reimbursement can be obtained from the tax authorities for the difference between the taxes paid and the tax amount new Olim pay when exercising their Oleh rights. Alternatively, if the borrower can prove that they have established residency (through a legal permit or permit that provides residency) and can demonstrate that their center of life is in Israel (even without making Aliyah) within 2 years of their purchase, they are eligible to receive a reimbursement from the tax authorities for the difference between the taxes paid and the tax which Israeli residents purchasing their first home would pay. Of course, cases can vary and this topic should therefore be discussed thoroughly with your attorney.
Taking a Mortgage After Making Aliyah
Advantages
- Up to 75% LTV financing.
- Discounted purchase tax rates for new Olim which can amount to a savings of 5-8% of the total purchase price.
Disadvantages
- Due to Bank of Israel regulations regarding how loans for Israelis must be structured, Israeli citizens are exposed to potential pre-payment penalties on the majority of their mortgages (from practically all lenders in Israel). The pre-payment penalty only applies in the event that market interest rates are lower at the time of early repayment. However, this represents a significant risk if the borrower intends to pay down the mortgage early.
- While there are exceptions – Israeli citizens are generally required to obtain a life insurance policy for the amount of the mortgage, naming the bank as the beneficiary.
***Note: There is one other point that may be considered an advantage depending on the circumstances. There is a special government-subsidized mortgage product for Olim, up to a few hundred thousand shekels, whose terms are 3%, fixed for 20-25 years, with the principal being linked to inflation and with no pre-payment penalty. If a borrower intended to take an inflation-linked mortgage, and the current mortgage rates on regular inflation-linked mortgages were above 3% – it would be advantageous to exercise this option. However, in our experience, most Olim are uncomfortable with having their principal linked to inflation and therefore prefer avoiding this option.
While the above information covers some of the main points as to when to take out your mortgage in relation to your Aliyah plans, each situation has its own considerations. For more information, please visit our website at https://www.firstisrael.com/ or call us at 02-567-1349.
The author, Tzvi Shapiro, is the Co-founder of First Israel Mortgage – a boutique mortgage brokerage with offices in Jerusalem and Tel-Aviv.
