Due to high real estate prices, putting a roof over one's head needs careful financial planning.
By JOHN BENZAQUENmortgage graphic 88(photo credit: )
Despite the growing demand for real estate in Israel, prices are relatively steady, with growths of only a few percentage points, if any. While the demand for expensive real estate, fuelled by overseas buyers, is driving prices on high-end properties ever higher, prices on those dwellings which are affordable to the bulk of the population remain steady, for the moment, anyway.
The current situation may not remain as is in the future. Prices are lower now than they were in 1999, for example, but if demand continues, prices may increase in the near future. If that is the case, it makes sense to buy an apartment now. This holds true for both veteran Israeli residents and new immigrants.
Despite the fact that the cost of real estate in the Holy Land is less than it was a few years back, it is still expensive. It costs even more when compared to the average Israeli income.
Yossi Gordon, director general of the Association of Contractors and Builders in Israel, points out the difficulty Israelis face in buying homes. "According to a survey we conducted a few months ago, we found that in Israel, the average cost of an apartment amounted to 102 monthly average salaries, compared to 72 in the western world."
According to this frustrating datum, the price of an apartment in Israel, in purchasing-power terms, is 41.67 percent higher than in Western countries. And due to the high cost of land, prices are always expected to rise, so the number of people who can afford to buy an apartment is constantly decreasing.
Buying a home is an essential part of many families' long term plans, since in Israel, very few apartments are built for rental purposes. In consequence, there is no long term rental market.
However, because of high real estate prices as compared to average incomes, putting a roof over one's head needs careful financial planning. And when planning the purchase of a home, a mortgage is a must, since very few people are lucky enough to have the resources to buy a place outright.
For those looking to buy a house or an apartment, now may be the right time, especially for those also who must avail themselves of a mortgage. The reason is simple arithmetic.
A family buying a house at a cost of $250,000 and taking a linked shekel mortgage of 70% of the value of the property ($175,000 for a period of 20 years) will have to pay interest of around 5.2% a year, which will eventually add up to $91,000. The total real cost of the dwelling will then amount to $341,000.
In a year, this same house may cost $260,000, and interest rates may rise to 6% a year. In that case, the interest costs would amount to $111,000, and the total cost of the property would amount to $370,000. With a real price increase of nearly $30,000, it is a 12% increase on the property's original price.
Luckily, the government of Israel assists first-time homeowners with mortgages. This includes both newly married couples as well as new immigrants. Mortgages in Israel, especially for new immigrants, are not particularly hard to procure.
The government of Israel, through the Absorption Ministry, has special mortgage schemes for new immigrants bearing interest rates lower than those offered in the open market. These mortgages rarely cover the full price of the property, 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. The annual rate of interest for a long term linked mortgage is around 5% a year.
The amount of aid offered by the government to new immigrants varies according to location and socioeconomic grading of applicants, in accordance with the criteria of the Construction and Housing Ministry.
1) A new immigrant family entitled to the highest mortgage will get NIS 207,455, divided into two parts: a mortgage of NIS 105,885 repayable over 25 years at 4% interest and a mortgage of NIS 101,570 repayable over 28 years, also at an annual interest rate of 4%.
2) If the request comes from a family that has been in Israel for over eight years and has not been able to buy a dwelling during that time, the family would be entitled to an additional NIS 43,630 repayable over 28 years at an annual interest rate of 4%.
3) Those willing to settle in the Negev region would get up to an extra NIS 67,200 of which half, or NIS 33,600, is a conditional grant and the other half is repayable over 25 years at an interest rate of 4%. This adds up to NIS 274,655, or approximately $66,000. This amount is perfectly adequate to acquire a dwelling in one of the townships of the Negev. In Mitzpe Ramon, for example, an apartment can cost as little as $60,000, while a semi-detached house can cost $70,000. In one of the northern development towns such as Ma'alot or Shlomi, prices may be 20 to 30% higher.
3) However, most new immigrants from English speaking countries prefer more central areas. There, the average price of a 100 sq.m. apartment in a middle class area can cost over $250,000. Plus, the government mortgage to new immigrants would only amount to NIS 207,455, which adds up to around $50,000, meaning the mortgage will only cover 20% of the value of the property.
4) In a Tel Aviv or Jerusalem middle class neighborhood, the price can go up to $350,000, and then the government largesse will only cover around 15% of the value of the property.
For immigrants from the USA and the UK who are used to mortgages of 80% and 90%, these sums may appear miserly.
Eran Aharonovich, sales manager of the Union Bank of Israel's mortgage division explains that this is where the banks step in. "New immigrants - or old timers, for that matter - can supplement subsidized government mortgages with bank mortgages at market interest rates of over 5% a year. In most cases, the mortgage bank would be willing to extend further credits amounting to up to 60% of the value of the property against a lien on the property," Aharonovich notes.
"In some cases we may be willing to give a mortgage of up to 75% of the value of the property, and with a guarantee by the EMI insurance company, the total finance of the purchase price may well reach 90%."
The size of the combined mortgages will depend on the credit worthiness of the borrower and his repayment abilities. A new immigrant family with limited means may only be able to purchase in Beit Shemesh. But for those immigrants who want to live in Tel Aviv and the surrounding satellite towns, or in Jerusalem, a cash endowment (or collateral) is a must.
We posed the following question to the mortgage banks in Israel:
A family of four with a monthly income of NIS 15,000 is buying an apartment in the center of the country, which costs $250,000. What mortgage would you offer?
Leumi Mortgage Bank
We would advice the client to take out a mortgage in two halves, half linked to the standard of living repayable in 20 years (monthly installments), the other half would bear a floating interest rate linked to the prime rate repayable in 25 years (300) monthly installments.
Bank Ha'poalim
We would advice to take a mortgage with monthly repayments of 25-30% of their monthly income. In the specific case this family can meet monthly payments of up to NIS 4,500.
Mizrachi Tefahot
We advice our clients to take a mortgage divided into three parts. 50% Linked to the cost of living repayable in 15 years (180 monthly installments), 20% linked to the cost of living at floating interest rates, repayable in 25 years (300 monthly installments), 30% Shekel mortgage floating prime rate interest rates and monthly repayments of NIS 4,080.
Discount Mortgage Bank
We would advice particular buyer to divide the mortgage as follows: 70% of the mortgage, linked to the Israeli consumer price index (CPI) at fixed interest rates for a period up to 20 years. The remaining 30% as non-index linked shekel mortgage with interest rates linked to the prime rate also for a period of up to 20 years.
Bank of Jerusalem
We would advice our clients to take a mortgage repayable in 15 years (180 monthly installments) divides thus: 25% Fixed interest rate linked to the cost of living, 25% Floating rate linked to the cost of living, 25% Shekel mortgage bearing a prime linked interest rate, 25% Shekel mortgage linked to the interest rate of Bank of Israel Short Term Bond.
Union Bank of Israel
We would advice our clients to take a mortgage made up as follows 50% linked to the cost of living at fixed interest rates. 25% Shekel mortgage at fixed interest rates and the remaining 25% a Shekel mortgage with a floating prime linked interest rate.
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