TYPES OF MORTGAGES IN ISRAEL
A fixed rate loan has an interest rate that doesn’t change at all throughout the lifetime of the loan. Fixed rate loans are excellent for borrowers with a low risk tolerance, as the monthly repayment is 100% predictable. Generally speaking, the shorter the loan term, the lower the fixed rate. That said, fixed rates are generally higher than variable rates, resulting in higher monthly repayments. Also, fixed rate loans may come with an early repayment penalty.
A variable rate loan - also known in Israel as a ‘Prime Rate Loan’ - has an interest rate that can vary monthly. Since 2009, variable rates in Israel have been extremely low, resulting in low monthly repayments and borrowing costs. Variable rate loans have no prepayment penalties. However, interest rates may climb in the future.
A semi-fixed loan - also known in Israel as a ‘Mishtana Loan’ - has an interest rate that is typically fixed for 5 year intervals. Every 5 years the rate automatically resets to a new level for the next 60 months, based on the bond market rates of the day. Semi-fixed loans have a much lower risk of a pre-payment penalty, as they come with regular ‘exit-windows’ at which point the loan can be repaid with no penalty. This loan option is a moderate compromise between the advantages of the fixed rate and variable rate loans.
Index Linked Loans
An index linked loan - also known in Israel as a ‘Tzamud Madad Loan’ - is available for both fixed rate and semi-fixed rate loans. The interest rate is much lower, but the capital is index linked, which means that the loan amount is slowly increased in line with inflation of the cost of living. In other words, the loan has two costs - the interest and the index-linkage. Generally, index linked loans are very expensive over the long run, and are only advisable as a short-term financing solution.
Foreign Currency Loans
It is possible to borrow in USD, GBP, EUR and certain other foreign currencies. Such loans can either be issued in foreign currency, or given as a shekel loan that is linked to a foreign currency.
Diversify With Multiple Loan Tracks
Unlike in many other Anglo countries, in Israel it is very normal to break the loan into various smaller loan tracks. This has the advantage of diversifying the risk profile of the loan, and can also be a very effective tool to manage other financial and regulatory requirements.