Israeli Mortgages 101 - A Land Flowing with Milk, Honey and Mortgage Tracks
It is no coincidence that the strong run that Israeli property as an asset class has enjoyed over the last years - prices have more than doubled in less than a decade - has gone hand in hand with an equally impressive run in the Israeli mortgage market - mortgages now account for one third of the credit in the banking system. Indeed, the more people purchasing real estate the more mortgages that are being taken, and, conversely, the increased ability to take a mortgage (due to low rates, accommodating banks, etc) contributes directly to the amount of properties that are being bought.
Taking a mortgage in your own country can be complex enough. Taking one in a foreign country, with a different language, set of rules, and institutions, and this complexity can increase exponentially. Add Israel’s eternal love-affair with paperwork and bureaucracy in to the mix, and potentially you have a recipe for disaster!
Therefore, over the course of a few articles, we will be clarifying the two main aspects of Israeli mortgages – their process and their structure. This article deals with the first of these aspects - the process of taking a mortgage in Israel:
After identifying the property you wish to buy, you (or someone representing you) will go to the bank in order to obtain a pre-approval. For this, the bank will ask for general background information (such as full name, address, date of birth, occupation, family status, copies of passports etc), details about the loan you are requesting (amount, term, etc), and proof of income. The latter will normally include several months worth of salary slips, two years worth of tax reports to your local tax authority, as well as 6 – 12 months of bank statements. If there are existing loans, the bank will ask for details and may request a loan statement. For more complex scenarios, the bank may ask for a letter from a local accountant stating your annual income.
As with many countries, the two main hurdles that need to be overcome before being pre-approved are the amount of the loan as a percentage of the property value (LTV), and the level of net income against the projected mortgage payments.
(i) LTV – The average LTV in Israel in 2015 was 52.8%. The current maximum LTV that a bank can grant is 75%, and this is only for first- time Israeli-resident buyers. Generally, the maximum LTV for overseas residents or for second homes is 50%. In certain types of transactions ,first time Israeli buyers may be able to get an LTV of up to 90%.
(ii) Income – The rule of thumb is that the monthly mortgage payments can be up to 30 - 40% of net monthly income (although the average last year was far lower at 25%).
There are other factors too that will be taken in to account, such as the length of time that you have been at your current place of employment, number of dependents, etc.
If the bank decides to approve the loan, it will say how much it is willing to lend and at what interest rates. The bank normally provides a piece of paper confirming the pre-approval and its terms. This is called an ‘ishur ekroni’ and is important to keep hold of. The ishur ekroni is valid for 3 months, and the interest rates offered are held fixed for 12 days.
TIP - This stage is optional, but highly recommended. Using a healthy dose of Israeli Chutzpah (!), you will want to take your pre-approval to various different banks in order to negotiate the most favourable terms. This is standard practice in Israel, and is almost expected behaviour by the banks !
2. The Evaluation
The bank will request a professional evaluation of the property in question. Each bank has a list of approved valuers, whose professional evaluation they are willing to rely on when it comes to determining the true value of the property. The bank will provide a list of approved valuers, and then it is up to you to arrange the evaluation (and of course to pay for the pleasure). The valuer will often send his report directly to the bank.
The valuer will look at the following when compiling his report:
Historic sales price of similar properties in the close vicinity
Location of the property
Age and type of construction
Size and upkeep of the property
Note that you can conduct an evaluation independently of the bank, but bear in mind that if a valuer is used who is not on the bank’s approved list, then you will need to pay for a second valuation using a bank-approved valuer before the bank approves the mortgage.
TIP - As with many things in Israel, don’t take things as a given. Valuers too are human beings, and if the valuation comes in lower than is necessary, then make sure to speak to the valuer in order to see if there is any room for an increase to his valuation. Speak to a professional about what factors to take in to account for your negotiation with the valuer. It is essential to understand that when buying an existing property, if the bank has approved a 50% loan say, they will lend 50% against the valuation received, and not against the price you are paying for the property. This is why it is so important to get the right valuation.
3. Legal Checks
The bank will request various documents to make sure that it is able to take the property as security for the loan, including the sales contract and the property’s details at the Land Registry. A common obstacle would be an old lien from a previous owner’s mortgage, which would obviously need to be removed before proceeding.
4. Other documents and Insurance Policies
Depending on the type of transaction and with which Authority the property is registered, there may be other documents that will need to be provided to the bank. This is common when buying 'off-plan' / 'on-paper', and may include, for example, proof that the buyer has already paid their portion towards the purchase in full. You will also need to assign to the bank a Buildings Insurance policy and, in most cases, a Life Insurance policy.
TIP – The above two points (excluding the insurance policies) can generally be provided by the lawyer who is acting for the purchase.
Once all of the above has been taken care of and approved, the bank signs off on the loan file and is ready to draw down the loan. It is important to note that in most cases, the bank will not draw down any of the loan until the buyer’s portion of the transaction is fully paid up. So, as an example, if the bank approves a 50% loan against a 2 million shekel property, the buyer will have to put down 1 million shekel in full before the bank draws down any of the loan.
Now that the process and stages of obtaining a mortgage are somewhat clearer, next time we will delve in to the nuts and bolts of the actual loan by going through the various loan “tracks” that are available. Without wanting to give away too much, lets’ just say that it is not simply a matter of ‘fixed or floating’…
See you next time.