Everything You Wanted to Know About Your Israeli Government Mortgage Benefit
What it is?
Israel’s Ministry of Construction and Housing oversees a mortgage benefit program that assists new Olim in funding the purchase of a home in Israel. This is part of an Israeli government benefits program which is commonly referred to as the Zakaut mortgage benefit.
For an Oleh to be eligible for the Zakaut mortgage, they need to secure the Zakaut mortgage within 15 years from their “Ma’amad Oleh,” which is the date their Teudat Oleh was issued. Other factors include age and previous home ownership in Israel. A married couple with or without children, a single parent, or a single oleh 21 years old or older, are entitled to a Zakaut mortgage if they have not owned an apartment within the past 10 years.
How to Apply:
The process starts by applying for a Teudat Zakaut, which is needed to start the Zakaut mortgage application. Both the process to get the Teudat Zakaut and the Zakaut mortgage application are handled by seven banks in Israel. The banks that are authorized to issue the Teudat Zakaut are Bank Mizrahi Tefahot, Bank Leumi, Bank Hapoalim, Bank Discount, Bank of Jerusalem, First International, and Mercantile.
More often than not, an Oleh needs to acquire a regular mortgage (i.e., non-Zakaut), due to the limited amount that can be borrowed with the Zakaut mortgage (additional information is provided below). Oftentimes, the application process for the Zakaut mortgage and the regular mortgage occurs simultaneously at the same bank. Please note, that if an Oleh receives their Teudat Zakaut from one of the seven Israeli banks mentioned above, but then decides to get their mortgage from another one of these banks, the bank, with whom they decided to get their mortgage, can request to have the Oleh’s Teudat Zakaut reassigned to them.
During the mortgage process, the Oleh can choose how many years they want for their Zakaut mortgage term. There are ten options available, which range from 5 through 10,15, 20, 25, and 30-year mortgage terms.
There are a few features that make the Zakaut mortgage different from regular mortgages. Two of the primary features that make the Zakaut mortgages unique are the below-market interest rates and no penalty fee for prepayment as a result of the bank’s loss of interest income (no prepayment penalty). The Zakaut mortgage program only offers a fixed, inflation-linked (Tzemudah L’Madad), interest rate for the purchase of a property and does NOT offer adjustable interest rates or non-inflation-linked interest rates. The examples below will help illustrate this information.
The interest rate the Oleh pays for their Zakaut mortgage is determined by the average fixed, inflation-linked, interest rate, for the loan term they chose. This rate is published by the Bank of Israel (BOI), Israel’s Central Bank, minus 0.5% (Oleh discount) with a maximum interest rate of 3.0%.
Please see the following example to understand how the discounted interest rate on a Zakaut mortgage is calculated:
An Oleh secured a Zakaut mortgage with a loan term of 20 years. At the time of the loan, BOI published 3.25% as the average fixed, inflation-linked, interest rate, for the 20-year term. Based on the 3.25% rate minus the 0.5%, the Olen would have to pay a 2.75% fixed, inflation-linked, interest rate on their Zakaut mortgage.
Here is another example to help you understand the maximum interest rate:
An Oleh secured a Zakaut mortgage for the same term of 20 years. At the time of the loan, BOI published 3.75% as the average fixed, inflation-linked, interest rate for the 20-year term. Even though the 3.75% minus the 0.5%, would be 3.25%, the Oleh would only pay the maximum 3% fixed, inflation-linked interest rate on their Zakaut mortgage.
Additionally, Israeli banks offer regular mortgages (i.e., non-Zakaut loans) with both fixed and adjustable interest rates that are inflation-linked.
Since most North Americans are not familiar with interest linked to inflation mortgages, let me explain. To understand your total cost (as in the spirit of the Annual Percentage Rate or APR regulations in North America) you would need to add the interest rate you are paying to the inflation index applied to the mortgage. The inflation index is published once a month by the Central Bureau of Statistics, a government agency.
For regular (non-Zakaut loans) the mortgage prepayment fees (prepayment penalties) are defined by government guidelines. The regulation provides a framework for the calculation the bank uses to charge a borrower for lost interest when the current market interest is lower than the interest rate on the mortgage payment the borrower is making to the principal (not interest) repayment, either in full or part.
For example, 10 years ago a borrower received a 30-year regular mortgage (non-Zakaut loan), with a 6% annual interest rate, and now they want to pay it off. The current average interest rate for a 30-year mortgage is 5%. The borrower will need to pay a fee that will partially compensate the bank for the loss on interest income (i.e., 1% annually over the remaining 20-year balance). This prepayment penalty does NOT apply to the Zakaut mortgage since there is no prepayment penalty.
Multiple factors determine the amount an Oleh can borrow with their Zakaut mortgage benefit. Various factors are assigned “points.” The total amount of points determines the mortgage amount that can be borrowed. Please click here for more information.
Below are the factors used in calculating Zakaut points:
Number of years in Israel
Single parent status
Buying in an area where the government has assigned additional benefits
Every Oleh’s situation is different, and the number of points can significantly vary from one Oleh to another. To put it in perspective, the maximum mortgage amount is approximately 300,000 NIS, with the average ranging between 100,000 NIS to 200,000 NIS. Your qualified loan amount can only be determined by the Israeli banks listed above. You will need to apply to see how your points are calculated to know the exact amount to which you are entitled.
Similar to programs that exist in North America, where they have government-backed mortgages, which allow borrowers to purchase a property with less out-of-pocket money, Israel accomplishes this by allowing the Zakaut mortgage to be a higher percentage of the property value than regular (non-Zakaut) mortgages. This ratio between the permissible mortgage amount and the property value is commonly referred to as the loan-to-value ratio or LTV. However, since the LTV ratio is regulated by the Bank of Israel, for the vast majority of Olim, the Zakaut mortgage does not provide a significantly higher LTV ratio than the regular mortgages offered by the banks. Currently, the maximum LTV ratio is 75%, assuming the borrower meets the other mortgage qualification requirements.
If you are interested in knowing the general amount of a Zakaut mortgage for which you qualify, please contact Nefesh B’Nefesh Answers & Advocacy Department at [email protected], or call us at *3680, Sunday – Thursday from 9:00 am 3:00 pm.
About the Author:
This guest post was written by Moshe Wilshinsky, who is the CEO of Moville Mortgage and Finance LTD. He has been in the Israeli mortgage industry since 1985 and is happy to answer any questions you may have. He can be reached at [email protected] or +972 54 522 6701.
The content presented here represents information and opinions of the guest writer and not Nefesh B’Nefesh.