Mortgage Types in Israel

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Mortgage Types in Israel

The following is a brief overview into the different types of mortgages offered by Israeli mortgage lenders.

Fixed rate, Shekel-denominated, CPI-linked

This is a NIS-denominated loan that can be taken out for a term between 5-30 years. The interest rate offered by the bank will typically increase in line with the loan term. While the interest rate remains fixed for the full term of the loan, the bank adjusts the remaining outstanding amount owed based on the official levels of inflation (reported by the Bank of Israel).

Large prepayment penalties exist for early repayment or refinancing of this type of loan. The good news is that these prepayment penalties only apply if the market interest rates at the time of early repayment or refinancing are higher than the interest rate on an applicant’s mortgage.

Floating rate, Shekel-denominated, Dollar or Sterling-linked

This loan is NIS-denominated that can also be taken for 5-30 years. The interest rate is based on the LIBOR index and the addition of some fixed margin. The outstanding principal balance of the loan is regularly adjusted as the NIS/Sterling exchange rate fluctuates. There are no prepayment penalties for this loan type.

Floating rate, Shekel-denominated, non-linked

This is another NIS-denominated loan that can also be taken for a period of 5-30 years. The interest rate is determined by taking the Bank of Israel Prime Rate and deducting some fixed margin. The outstanding principal balance of this loan is not adjusted according to inflation or some foreign exchange rate and there is no prepayment penalties tied-in.

The hybrid loan

The details of this type of loan often differ depending on the mortgage bank that is used by the applicant. Typically, a hybrid loan is NIS-denominated, linked to the CPI and has a fixed rate for a specified number of years. The interest rate adjusts every 1, 3, 5 or 10 years, depending on the set conditions of the loan. At each of these dates the borrower is given the option of prepaying or refinancing the remaining balance of the loan without facing a penalty.

Zakaut

These government loans are offered to new immigrants, young couples and first time buyers, as well as those buying a property in a development area. It is NIS-denominated, linked to the CPI and has a fixed rate of 4% for a period of 25 years.

Graces

Most mortgage banks in Israel offer graces on loans taken out by home owners who are involved in purchasing a home in Israel while paying a mortgage elsewhere or alternatively while paying rent. The bad news is that Graces are not offered on Zakaut loans and some banks do limit graces to certain loan types.

The two types of graces available to property owners in Israel are:

• Partial – where only the interest is required to be repaid during the grace period.

• Full – This involves no payment being made during the grace period and any interest that should have been paid is added to the loan balance and is paid back as part of the loan once the grace term comes to an end.

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