When purchasing property in Israel, many buyers need to take out a mortgage from an Israeli lending institution. There is a wide range of mortgage options available and it is important to understand the options in order to select the loan that best fits your financial profile. The following is a description of the most common mortgage options available.
Shekel Mortgages
- Fixed Loans – The benefit to these are that your payments won’t ever fluctuate, but you need to beware of the potential pre-payment penalties
- Variable Linked to Prime – The benefit is these typically offer cheaper rates than fixed, but be vigilant on watching your monthly payment because the nature of this loan is that it will fluctuate whenever the Bank of Israel changes the base rate.
- Adjustable rate mortgages – This is basically a hybrid of fixed and variable. This loan changes every 1.5 to 5 years. It will allow you to budget for several years at a time and the potential early termination fees are much smaller than the fixed loans.
- Linked to the Madad (cost of living index) – This option offers the lowest interest rates, but the principal is adjusted monthly based on the cost of living index, which typically rises 2% annually. While the initial payments are low, the long-term cost can exceed that of a mortgage linked to the prime rate.
Foreign Exchange Mortgages
A foreign currency mortgage is taken in currencies like USD or Euro, with interest based on SOFR or Euribor plus a fixed premium. Borrowers often choose this option to match their income currency and hedge against exchange rate fluctuations. For example, someone earning in USD may opt for a USD mortgage to avoid losses from a weaker dollar. Others are drawn by lower interest rates. However, this type of loan carries currency risk and should be considered only with professional guidance.
In Conclusion
A clear understanding of the terms and conditions associated with each loan product offered by Israeli banks is critical to securing the financing solution that best aligns with your financial goals. Even minor differences in interest rates or repayment terms can significantly impact the total cost of borrowing over time. To ensure the most favorable outcome, it is advisable to compare multiple loan options and engage in informed negotiations with the banks regarding rates and conditions prior to making a final decision.