So, you’ve decided that you want to buy a home in Israel. You’ve probably looked at all the various Anglo communities like Jerusalem, Beit Shemesh, Tel Aviv, Modiin or Raanana, and chosen a favorite location. You’ve even seen a few properties and got a feel for the local prices.
Unless you are lucky enough to be able to pay for the house in cash, you still need a mortgage in order to turn your dream into a reality.
But if you don’t know how much mortgage you can borrow it’s extremely difficult to know how much home you can afford to buy. This lack of clarity can create a feeling of Catch-22 that many buyers experience at the beginning of the purchase process.
They can’t work out which type of home to buy without knowing the mortgage details, but they can’t really know how much they need to borrow without knowing what type of house they want to buy!
In order to move past this stage and start start zeroing in on your price range, you need to find a balance between the following 3 factors:
Loan to Value ratio
Monthly Repayment
Income to Repayment Ratio
Loan To Value Ratio (LTV)
LTV is another way of saying what percentage of the property value a bank will lend you.
Typically, first time buyers living in Israel are eligible for 75% financing, whereas foreign residents and those buying a second home are capped at 50%.
There are various nuances to these rules, so if you are concerned that you are not eligible for 75% it is strongly recommended to ask a qualified mortgage broker to see if there are creative ways to fall within the higher LTV limit.
Monthly Repayment
The monthly repayment on a mortgage is determined by the size of the loan, the interest rate and the number of years of the loan term.
The maximum loan term is 30 years. However, because Israeli banks want the mortgage finished by age 80, borrowers over the age of 50 will be unlikely to qualify for the maximum loan term.
Interest rates are always subject to market changes and the specifics of the loan structure, but you should work on finding a ballpark figure with which to start your calculations. At time of writing I tell people to start with the figure of 5%.
Once you know the loan amount, interest rate and loan term, you are now in a position to work out mortgage repayment. It is recommended to go online and find a good mortgage calculator that allows you to experiment with these numbers, and start fine tuning your mortgage plans.
Income To Repayment Ratio
Income to repayment ratio looks at your ability to qualify for the desired loan amount. The key question in this regard is how much your combined net monthly income is relative to the size of the monthly repayment. Israeli banks like to approve repayments of 33% of net monthly income, although technically they are allowed to approve income-to-repayment ratios of up to 40%.
Finding The Balance
The LTV ratio, monthly repayment and income-to-repayment ratio are obviously interconnected. The more you borrow, the higher your monthly repayment. The more the monthly repayment, the higher the income requirements are.
Once you’ve been through the process of balancing these numbers, you may find that you will be better served by looking at different price points or even different neighborhoods. Or you may find that the picture now looks better than expected.
Either way, knowledge is power, and knowing how to navigate the mortgage options means that you will have the power to move forward with your purchase with confidence and competence!