Making aliyah from the US was a life-long dream for Yehuda. From the beauty of the ancient alleyways of the old city to the endless sounds of the Machaneh Yehuda market, Yehuda felt a deep love and connection with Israel.
Like many others before him, Yehuda knew he would miss his 7-Eleven “Slurpees” and Amazon Prime. He also expected somewhat of a culture-shock and a learning curve, but as he admits, he was totally unprepared for how different some things are in Israel. Some of these differences can be silly, but others are of utmost importance to understand in advance for any person interested in making aliyah.
In most cases, the most important purchase a person making aliyah will make is a new home. Mortgages and financing offered by Israeli banks are very different from those commonly offered in the US, and it is crucial to have a good understanding of how they differ.
In this article we will present some of the financing options currently offered to non-Israeli citizens and foreign residents, as well as review some of the requirements to qualify for financing.
Maximum LTV (Loan-to-Value)
LTV, Loan to Value, is the amount one can borrow relative to the purchase price. For non-Israel residents, The Bank of Israel has imposed a maximum of 50 percent LTV on the purchase of a residential home in Israel. For Israeli residents purchasing their first home up to 75 percent LTV is available.
Mortgage Structure
Surprisingly, non-Israelis have more options than Israeli citizens when it comes to mortgage structure. In the US, a first position loan must comprise one mortgage type, term and rate. However, in Israel, a loan may comprise numerous different loan types, terms and rates. While both Israelis and non-Israelis may take a mortgage wholly at a fixed rate, only non-Israeli citizens are allowed to take the entire mortgage at an adjustable rate. Israelis, on the other hand, are limited and can take only up to 33 percent of their mortgage at an adjustable rate.
Life Insurance
Banks in Israel generally require that borrowers take out a life insurance policy in Israel for the sum being borrowed, naming the bank as the beneficiary of the policy. By doing so, the bank is insured that in the event of one of the borrowers’ deaths, the mortgage will be paid off in full. While this is a general rule, it should be noted that in certain cases it is possible to obtain a waiver on this requirement and/or assign an existing life insurance policy from the US to the mortgage bank in Israel.
Prepayment Penalties
The possibility of a borrower incurring a pre-payment penalty is dependent on the structure of the loan that was secured. While variable-rate loans generally do not have pre-payment penalties, fixed-rate loans often incur penalties in the event that the loan is paid off at a time when interest rates are lower relative to when the loan was originally taken out. The size of the penalty is dependent on the difference in the two rates.
Mortgages in Israel are offered in a wide array of currencies including NIS, USD, EUR, GBP, CAD, CHF and JPY. Fixed rates on non-shekel linked loans are available in USD and EUR, but only for a maximum term of 10 years.
Approval Requirement
The Bank of Israel limits the amount a bank may lend to a borrower to a 40 percent debt-to-income ratio. This means that if someone earns a net monthly income of $10,000 the maximum monthly mortgage payment that a bank may approve is $4,000. “Income” is defined differently by different banks. Some banks accept all forms of income, including capital gains and foreign dividend distributions, while other banks are more stringent and will only consider wages as income.
Age Restrictions
While discrimination based on age is forbidden in the US, the generally accepted practice in Israel is to limit the term of the mortgage so that the loan is fully paid off by the time the borrower reaches 75-80 years of age.
Appraisals
Each bank has its own list of approved appraisers whose job is to evaluate the value of the property, as well as to provide information regarding the status of the property in terms of ownership and liens, and to check if the property was built according to the building permits. Often, a property will have been constructed with deviations from the building permits (please refer to articles regarding the matter in our series “The Ins and Outs of Real Estate in Israel”). The law states that the bank appraiser is only allowed to take into account the portion of the property built according to the permits, which can cause a reduction in the value of the appraisal and in turn decrease the loan amount the bank is willing to extend.
Disclaimer: The information contained herein does not constitute legal advice and should not be relied upon in lieu of legal counsel.
By Yaacov Epstein
Written together with Tzvi Shapiro, who is the co-founder of First Israel Mortgage (www.firstisrael.com), a boutique mortgage brokerage servicing English-speaking and other foreign residents looking to purchase property in Israel.
