By Moshe Wilshinsky
Unlike the US and many western countries, in Israel your mortgage may not have just one set of terms. You can chose to break up the amount of money you have been approved for into a number of parts each with its own set of terms. Over the past few years there have been various new regulations from the Bank of Israel that dictate some parameters of those sections, if you are an Israeli citizen. For example the Bank of Israel requires that at least one third of the amount you are borrowing have an interest rate that is fixed for the entire term of the loan, additional third of the loan amount have an interest rate that is fixed for at least five years, and they limited all the sections to have a maximum period for repayment to thirty years.
The same way you buys clothes that both “fit” you in terms of its measurements as well as style, so too should the mortgage you get be made up of components that “fit” you. This requires both understanding industry parameters (e.g. what the banks will allow you to borrow) and your preferences. If you are thinking I don’t have preferences because I don’t care or know, you will be surprised that you probably do, just maybe no one ever explained to you how to relate your preferences to various loan types available in the market. If you ask any of our clients this is something we spend a lot of time on and I believe is an important step in the mortgage process. Over the next few articles I will try to give you some basics to help give you some perspective and a point of reference to help you better understand both what is available as well as better understanding the mortgage you may have.
Lets start with something you may have heard more about, investment portfolios. The same way investment portfolios should match for example your tolerance of risk, return and liquidity (i.e. when you need to be able to spend the money you invested) and even those familiar with the basics of investing know that while everyone wants the highest return which is the interest they make on the money they invested, there is a direct correlation between how high that interest is and the likelihood or risk of not getting the return and even losing some or all of the money you invested) and return the higher the return the higher the risk and before you invest in an investment promising a potential higher return you need to really make sure you understand and can tolerate the risk of losing some or all of your capital. A major factor in determining those investment factors is the currency because like Interest Rate Risk Currency Risk can affect the value of your money.
With a mortgage since you are on the receiving end of an investment relationship versus the giving end when you make an investment while the principals are the same some factors seem in reverse order. Loss of principal is every borrowers dream and neither exist in the market today some of the old Zachaute (Government Mortgages) gave the borrower a gift and waived the principle after a period of years and those that are old enough to remember in the ’80s there were mortgages from the ’70s that deflated so much banks requested they just be paid of (usually for small change) since the postage and handling were costing need more that the loan was worth, so loss of principal is not the Risk a borrower has to be careful of the risk of a future increase of their monthly payment. That has to do with the two factors I mention above the Interest rate and the Currency. Let me start with the interest issues and then we will touch on currency. We are not talking about a particular interest rate we are discussing here a type, e.g. fixed vs adjustable. While the adjustable allows an initial lower monthly payment on a mortgage for someone who plans on keeping the mortgage a long time can represent a real risk. Understand there are no black and white issues here it always depends on your particular situations for example I have clients who are active Real Estate investors buying properties from builders while the property is just beginning construction and the investors have the intention of selling the property shortly after it is completed and they have the income and liquidity (i.e. the cash) to handle a larger payment and even significantly pay down the principle for them the adjustable rates are ideal vs a family on a fixed income that uses a mortgage to buy their home who don’t have the above they are the reason I believe (based on public statements made by David Zahkin from the Bank of Israel) the Bank of Israel initiated the regulations I mention in the beginning of the article out of a concern of the risk created by the long term exposure to the average borrower that the miss use of adjustable rates. In the next articles I will discuss currency and detail what is available in the market.
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd. Contact information: Israel: Dial: 073-796-2226 and then press the special 711 Bizness Magazine extension. In the U.S., dial: 201-377-3418; in the U.K., dial 208-596-4501. Website is at: www.movillefinance.com