mortgage graphic 88.
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At the Pessah Seder one of the “Four Sons” is the one who does not know how to ask. In order to make an educated inquiry - and to be able to ask - one needs a certain background in the material one is investigating.
Mortgages certainly fall into the ambit of an area in which most people do “not know how to ask.”
It is astonishing how many of us, intelligent and savvy in our own fields, enter the mortgage maze with glazed eyes and a total dependence on the advice of friends and relatives and conventional wisdoms which are untested.
Tweaking a mortgage in terms of years and rates can make the difference of hundreds of thousands of shekels over the life of the loan. But the first thing to determine is which mortgage is most suitable for your needs and circumstances.
There are approximately 30 types of mortgages offered by Israeli lending institutions but at the end of the day they boil down to four different types.
First, there is the fixed-rate, index-linked loan. For this type of loan the name of the game is predictability. Well, almost. Because the interest is fixed to the monthly return on the loan - which is composed of capital and interest - it is known ahead of time. This gives the lender a certain level of control over his future finances. The return of the loan however is linked to the consumer price index and this injects a level of uncertainty. The amortization table which you will get from the bank is the Spitzer Amortization Table which will clearly show you your repayments from the first payment to the last. An amortization table (in Hebrew: luach silukin
) is essentially a list of payments over the life of the loan until the final payment to the bank. The drawback of this loan is that usually if you suddenly come into money and decide on early repayment, the bank will take a hefty early repayment fee.
Secondly, there is the variable interest loan which is index-linked. This loan is linked to the cost of living index. The payment of the interest is varied every predefined period, usually, every three months. The interest is unknown to a certain degree as it is predicated on external objective determination such as the rate of interest decided from time to time by the Bank of Israel. This loan is usually less expensive than the fixed-rate loan but the level of unpredictability is relatively high. What seems to be a relatively attractive loan at the outset could turn into a nightmare if the variable rate of interest is pushed up by the financial authorities. For example, a week ago the Bank of Israel raised the interest rates by 0.25 percentage points to 1.5%. This might not seem like a huge amount to the ordinary consumer and interest rates seem very low viewed historically, but it should be noticed that this is the fourth raise of interest in the last few months and could be the beginning of a trend. The main reason the Bank of Israel raised the interest rate is the overheated property market with prices reaching record heights. This market is driven by the cheap money that people can borrow and the Bank of Israel wants to put on the brakes.
Thirdly, there is the unlinked loan based on the prime rate. The capital sum and the interest in this loan are not linked to the cost of the living index but the prime interest rate defined by the Bank of Israel. The prime rate is published every month and added to the base rate is whatever sum you have agreed with the bank to pay over prime rate. Again, the importance of negotiating with the lending banks for the best possible deal is clear.
Fourthly, there is the foreign currency linked loan. Israeli banks make
loans linked to foreign currency ranging from the Yen to the Dinar.
However, the most popular foreign currencies are the Euro, Sterling and
Dollar. These are excellent loans for people living in a foreign
currency environment, either foreign residents living in Europe of the
US or Israelis whose income is foreign currency based.
The above is an introductory taste of the mortgages which the Israeli
finance sector offers us. There are indeed amazing opportunities but it
is important not to get lost in the maze.
In our next columns we will enter into more detail into how to obtain the best possible deal from the lending institutions.
Dr. Haim V. Katz is a senior partner
in a prominent Israeli law firm with offices in Jerusalem and Tel Aviv.
Sam Katz is young jurist living in Jerusalem. They have collaborated on
several legal works on probate and land law including the e-book
“Buying Your Home in Israel."
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