An apartment is the biggest purchase most people make in their lifetime and often an expense that we help our children with, so it makes sense to have this discussion with your children years before it is relevant.
Let’s focus on the most common issue: how much can we spend on an apartment, or better yet, how much will the mortgage bank let us spend?
It’s not just the mortgage bank (lender) that is involved in the decision; the Israeli government is involved as well. Let me give you a little background to understand why the Israeli government suddenly got involved in how big a mortgage you can get. Believe it or not, it’s not just the Israeli government; countries from all over the world are involved in mortgage decisions for their citizens.
Governments from all over the world have agreed on set of rules called the Basil Accords, which include mortgages. In Israel, it is the Bank of Israel, or BOI, that issues regulations the banks need to follow. After 2008, the BOI made many rules that affect the amount borrowed and type of mortgage that a borrower in Israel can get.
Neither the BOI nor the committee writing the Basil Accords are control freaks; they are trying to develop a way to make an educated guess in answer to a few important questions regarding granting a mortgage to a particular borrower. These include: • Can this borrower pay the monthly payments? • Even if the borrower can pay, will they? • If they don’t, can the bank get back the money they lent, the interest, and any costs? When a borrower doesn’t pay, it is called a “default,” or in Hebrew, a pigur. The chance of defaulting on a mortgage is a type of credit risk. Loans with better credit risk are called “prime loans” and loans with higher credit risk are called “sub-prime loans.”
Many years ago your banker knew your family and it was really just up to them, or them and their boss, to make the decision of how much and the type of mortgage to give you. While personal relationships still matter, now decisions can only be made within the guidelines we discussed above.
Regardless of how well the bank manager knows the borrower and wants to help, the bank manager has to take into account several issues, including 1) How much of your own money are you (not the bank) investing? This is also known as the down payment; in Hebrew, it’s the hon atzmi. 2) Your income 3) Your credit history 4) Property you are buying Regarding Point 1, the average Israeli citizen needs a minimum of 30% of the property’s value. For some Israeli citizens, 25% is sufficient (those who meet a certain criteria that demonstrate financial strength e.g. ratio of monthly mortgage payment divided by their monthly income after taxes).
This brings us to Point 2, income. How income is measured and over what period of time is a bit involved, but in short, in most cases, the monthly mortgage payment divided by your average monthly income needs to be less than 40%. For example, if you have an average net income of NIS 9,000 and the mortgage you want has a monthly payment of NIS 3,000, that is 33% of your net income. That works. A much larger monthly payment would not.
Regarding Point 3, your banking history over the past 90 days (or more, if you are applying at your own bank). Any bounced checks or returned horaot kevah can make qualification anywhere from difficult to impossible. The bank will also order your credit report from either Dunn & Bradstreet Israel or BDI that gives them information based on the Israeli credit reporting law chok netunai ashrei. For olim, they also look at your credit report and score from abroad. Looking at credit history represents the “even if the borrower can pay, will they?” question from above. Point 3 is the least flexible; banks will be less tolerant of problems here.
Regarding Point 4, keep in mind that the property has to be a legal residential structure and its value is not necessarily defined by what you are paying it is determined by the lower of a bank-approved appraisal based on regulated guidelines or your purchase price.
I know many of you are thinking, “Given the current situation, how will any of our children be able to buy a home?” Yes, as yet, there is no solution. A number of professionals—including myself—are working on it and, hopefully, the government will eventually get behind the correct initiatives. By educating our children about the mortgage process and buying property, we can prepare them for their future home purchase and possibly spark an interest that may help with finding the solution.
You may think I am dreaming, but then again, that is what people told me in the 1990s when I said one day banks in Israel will use credit reports on a regular basis. To paraphrase Rabbi Kahaneman: “I am dreaming, but not with my eyes closed.
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd. Moshe has decades of experience in the field and was involved in the development of the Israeli credit reporting law (chok netunai ashrei). ABOUT THE AUTHOR Moville Mortgage & Finance Ltd. can be found on the web at www.movillefinance.com. They can be reached at 073-796-2226 ext. 711. In the US, dial 201-377-3418; in the UK, dial 208-596-4501.