Buying a home is an essential consideration for any new family in Israel because in this country, very few apartments are built for rental purposes.

Consequently, a long-term rental market does not exist. But because of the high real estate prices in relation to average incomes, this means that buying a roof over one’s head needs careful financial planning.

When planning the purchase of a home, a mortgage is a must for most people. The government of Israel assists firsttime home owners with mortgages. This includes newly married couples and new immigrants.

Mortgages in Israel, especially for new immigrants, are not that hard to obtain. The government, through the Absorption Ministry, has special mortgage plans for new immigrants that bear lower interest rates than those offered in the open market. These mortgages do not cover the whole price of real estate, especially in the central regions of the country, but the shortfall can be covered by additional mortgages from local banks, which bear market rates of interest.

Demand for government mortgages is nearly nonexistent because they charge annual interest rates of 4 percent for fixed rate linked mortgages. This compares to the current average annual rates of 3% charged by mortgage banks.

So for those who want to buy a house or an apartment, the time may just be right for the majority of home buyers who would require a mortgage. Interest rates are very low, which means the real cost of the apartment mortgage payments is relatively low. On a 20-year mortgage of NIS 100,000, each additional 1% interest rate adds another 10% to the total cost of the mortgage. The most a new immigrant can get from a government mortgage is something like NIS 200,000. The most a local can get is NIS 162,000. For immigrants from the US and the UK who are used to mortgages of 80% and 90% these sums may appear miserly -- and they are.

Recently a new law was passed in the Knesset that will give first-time buyers a monthly subsidy that will cut the monthly payments on mortgages by approximately NIS 800. However, an average four-room apartment in a developing area costs at least NIS 500,000. Four rooms and not three because the most a local can get depends on the size of his family. The average family eligible for the full mortgage will need an apartment of at least four rooms. This also holds true for new immigrants.

Small government mortgages create a problem for low-income families, as they will have trouble getting more money from the mortgage banks.

Avi Badlov, deputy manager of the Central Region Mizrachi Tefahot Bank, told Real Estate, “Our bank will only authorize a mortgage if we are convinced that the borrower has the means to meet monthly payments and provided total monthly repayment amounts to not more than one-third of the family’s monthly income.”

Most mortgage banks have similar rules.

In addition, most mortgage banks will not authorize mortgages in excess of 60% to 70% of the value of the property.

The average cost of an average fourroom apartment in the dormitory towns of Tel Aviv or Jerusalem is NIS 1.5 million. This means that a first-time buyer will need a cash base of NIS 450,000 to NIS 600,000 to be able to afford a roof. In more distant areas, average prices may amount to NIS 500,000 to NIS 600,000.

 This will require a cash payment of NIS 150,000 to NIS 240,000, a large sum of money for a low-income family. Taking out a mortgage would be the only recourse for the majority of home buyers. They have no choice. But when it comes to the kind of mortgage they are taking out, the “mix” may be all important.

At present, interest rates are very low, especially on floating non-linked (to the cost of living) mortgages. The rates on fixed linked mortgages are higher, but it is most ill advised to put all one’s mortgage eggs in the non-linked floating rate basket. At these times interest rates are low, but they will rise in the future, and each increase in market interest rates will increase monthly payments. It is therefore advisable to take out a mortgage made up of 20% - 25% non-linked floating rate funds, 10% - 15% of a foreign currency, and the balance m a d e up of linked funds.

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