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Most people should not buy a home in Israel until they’ve spent time in the country, determined where they’d like to live, established a social support network, and attained some direction on where and in what field they’ll be working. Once you’ve accomplished these major milestones, you can start to consider buying, but the basic buy-versus-rent decision is not as simple as it is in many countries. Let’s start by looking at the most basic decision: to rent or to buy.
After speaking to hundreds of potential olim over the past few years, I witnessed their extreme disappointment with the state of the Israeli real estate market. With average real estate values having risen more than75% around the country over the last 15 years, many more families are being priced out of the property market. Young couples, olim and even veteran Israelis find it increasingly difficult to afford an apartment in their chosen areas of the country (near family, friends and employment). At this point it’s hard to say if Covid will affect prices despite the fact that in some areas prices have plateaued, and have even dropped in others.
Basically, if you can afford to buy at current levels, and you’re not considering the purchase primarily as an investment – then fine, buy, if you are comfortable with the reasoning that what happens to the value of your investment is less important than the benefit you will gain from owning your own property. As long as your mortgage is not structured too largely as a variable rate mortgage (that will go higher as interest rates rise – and they will start rising as some point over the next 25 years …), you probably should be fine. (This was a gross over-simplification, but it serves to explain the point here.)
However, if you’re stretching it financially more than a little, then that’s a completely different story. Real estate is an investment, and like all investments what goes up can definitely come down.
However, for most people their home is more a place to hang one’s hat than a true financial investment. People buy for the comfort of knowing they have a place to live and settle down, make friends, and build a life. But they need to be able to afford the monthly mortgage payments (not to mention the initial down payment).
There are many variables here with Covid thrown into an already complicated housing market. However, the bottom line is that with the continued uncertain direction of the Israeli property market I would recommend buying a property only if you can really afford it.
In countries that have seen a consistent rise in the value of housing, high rental costs and favorable tax incentives for homeowners (like in the United States, where mortgage interest expense is tax deductible), owning a home is standard. Israel, however, lacks some of these basic incentives for owning residential real estate. For instance, real estate owners in Israel don’t receive tax breaks on the interest that they pay on their mortgage. True, one can sell a property in Israel once every four years and not pay capital gains tax, and if it’s your sole property this tax exception is available every eighteen months. But in practice, if you’re buying as a primary residence, then capital gains considerations are secondary and there is no tax advantage to owning versus renting.
Furthermore, of critical importance to the buy/rent decision is the rent-to-value ratio, which in Israel is considered very low by Western standards. That means that you pay a relatively cheaper rent than you would for a similarly valued property in other countries. Typical rent-to-value ratios in Israel range from 2–4% annually of the value of property. So, for example, if you rent a NIS 1,500,000 home at a 3% rent-to-value ratio, you’ll be paying NIS 45,000 a year, or NIS 3,750 a month. While not accurate for all locations in Israel, these guidelines give a very good estimate of what to expect. In the United States (especially after the collapse in real estate prices), rent-to-value ratios often reach 8–10% annually, making renting much more expensive and thus less attractive.
Renting offers much greater flexibility to move as necessary. If your job changes or you decide to move to a different community, your costs will be far lower than if you needed to sell and then buy in your new location. This greater flexibility can be a big advantage for olim, for whom the feeling of freedom can be invaluable. If you’re unsure as to whether a neighborhood is right for you, renting is usually the best option.
Renters also don’t need to tie up large amounts of capital in their home, and can use their savings for investing elsewhere. While many people think that real estate prices in Israel only go up, this assumption is false, even though values have risen drastically over the past couple of decades. There are ups and downs like all asset values. As a renter, you might also be able to afford a larger place than you could afford to purchase (especially if you have limited capital but a strong monthly cash flow).
Despite the arguments for renting, most Israelis are homeowners. The reasons are as much psychological as economic. Perhaps the most important factor in favor of homeownership is the desire for long-term stability.
Owning a home also offers the ability to enjoy capital appreciation if your property goes up in value. But, as we’ve seen worldwide in recent years, it’s not a one-way street — you also risk capital depreciation. In most situations, neither depreciation nor appreciation should concern you too much, in the short run, because it doesn’t really matter what your home is worth if you’re not planning to sell. Unless the value of your home drops so dramatically that your home is worth less than your mortgage value (“underwater”), the current value is not critical, as long as you can continue to afford to live there.
Most homeowners finance their home by taking out a mortgage. Mortgages tend to be the cheapest credit available in Israel. Taking a long-term mortgage at a low rate can increase your cash flow and give you the opportunity to increase your equity in your home. This forced savings plan is the most important reason why so many couples find their house to be the largest asset they own when they get to retirement. Because losing your home has such negative consequences, it forces you to make those monthly payments. Owning a property also reduces the costs of moving, compared to a renter who may be forced to move every few years.
The size of your home needs to fit into your financial plan. Don’t overextend yourself. If you’re looking to buy, understand that the Israeli housing market is considered expensive, especially given the relatively low salary level in Israel. According to statistics published by the Taub Center for Social Policy Studies in Israel, housing in Israel is more expensive than in 174 out of 175 large American cities.
Assessing the type of property you can afford is critical to your long-term financial health. Taking on too large a commitment means that you will feel the extra strain for years and years to come. While many Western olim come from countries and communities where owning a large stand-alone house is the norm, in Israel it is reserved for those living in the periphery (where housing prices are much cheaper), or to those on the upper end of the socio-economic scale.
If living in a big house is important to you, you might need to compromise on the location. Assess all the additional costs involved in owning a house and ensure that you’ll be able to comfortably afford all the costs. Anticipate all the costs when buying in order to avoid overruns.
While every case is different, this table shows an example of the total costs involved when purchasing an apartment.
| Buying Costs | Home Purchase | Additional Costs | Assumptions |
|---|---|---|---|
| Apartment price | 1,500,000 | ||
| Legal fees | 17,400 | 0.01% | |
| Agent fees | 26,100 | 0.015% | |
| Air-conditioning | 30,000 | ||
| Purchase taxes | 17,459 | ||
| Moving expenses | 4,000 | ||
| Fee for registration of property | 3,750 | 0.0025% | |
| Engineer | 585 | ||
| Mortgage bank origination fee | 2,000 | 800,000 mortgage | |
| Mortgage broker | 8,000 | ||
| Property appraisal | 1,330 | ||
| Bars/alarm/electricity upgrade | 30,000 | ||
| Furnishing | 30,000 | ||
| Renovations | 50,000 | ||
| Rent till move-in date | 32,000 | 8 months at 4,ooo | |
| Miscallaneous (installations, notary, etc.) | 20,000 | ||
| Garden | 15,000 | ||
| Kitchen | 35,000 | ||
| Subtotal | 1,609,294 | 213,330 | |
| Total Costs | 1,822,624 | ||
| Total Costs | 1,822,624 | ||
| Subtotal | 1,609,294 | 213,330 | |
| Total Costs | 1,822,624 |
Before you sign to purchase a property, make sure that you have the financing in place. Don’t assume you’ll be approved for a mortgage. Get pre-approval from at least one bank. Furthermore, put together a cash flow analysis (see below) to help you determine where you’ll be getting the money for each payment. Unlike many countries, where almost everything is paid at the closing, most real estate deals in Israel have payment schedules over months and even years when purchasing an apartment, especially if it is purchased on paper (i.e. prior to being built).
| Apartment Financing | January | February | March | May | August | September | Total | |
|---|---|---|---|---|---|---|---|---|
| Net price (sale of current home) | 600,000 | 500,000 | 100,000 | 600,000 | ||||
| Mortgage addition | 843,061 | 843,061 | 843,061 | |||||
| Savings: | ||||||||
| Bank #1 | 200,000 | 200,000 | 200,000 | |||||
| Bank #2 | 100,000 | 100,000 | 100,000 | |||||
| Bank #3 | 80,000 | 80,000 | 80,000 | |||||
| Monthly subtotal | 500,000 | 200,000 | 200,000 | 0 | 923,061 | 0 | 1,823,061 | |
| Total | 1,823,061 | 500,000 | 700,000 | 900,000 | 900,000 | 1,823,061 | 1,823,061 | |
| Buying Costs | Budget | Projected Expenses | ||||||
| Apartment price | 1,500,000 | 300,000 | 300,000 | 300,000 | 300,000 | 300,000 | 1,500,000 | |
| Legal fees | 17,400 | 17,400 | 17,400 | |||||
| Agent fees | 26,100 | 26,100 | 26,100 | |||||
| Air-conditioning | 30,000 | 30,000 | 30,000 | |||||
| Purchase taxes | 17,459 | 17,459 | 17,459 | |||||
| Moving expenses | 4,000 | 4,000 | 4,000 | |||||
| Fee for property registration | 3,750 | 3,750 | 3,750 | |||||
| Mortgage bank origination fee | 2,088 | 2,088 | 2,088 | |||||
| Mortgage broker | 8,350 | 8,350 | 8,350 | |||||
| Engineer | 585 | 585 | 585 | |||||
| Property appraisal | 1,330 | 1,330 | 1,330 | |||||
| Bars/alarm/electricity upgrade | 30,000 | 5,000 | 10,000 | 5,000 | 10,000 | 30,000 | ||
| Furnishing | 30,000 | 10,000 | 20,000 | 30,000 | ||||
| Renovations | 50,000 | 50,000 | 50,000 | |||||
| Rent until move-in date | 32,000 | 12,000 | 16,000 | 4,000 | 32,000 | |||
| Miscallaneous (installations, notary, etc.) | 20,000 | 2,000 | 5,000 | 5,000 | 8,000 | 20,000 | ||
| Garden | 15,000 | 15,000 | 15,000 | |||||
| Kitchen/bathrooms upgrade | 35,000 | 35,000 | 35,000 | |||||
| Monthly subtotal | 394,874 | 303,750 | 17,000 | 315,000 | 386,000 | 406,438 | 1,823,061 | |
| Total | 1,823,061 | 394,874 | 698,624 | 715,624 | 1,030,624 | 1,416,624 | 1,823,061 | |
| Cash flow monthly | 105,126 | 103,750 | 183,000 | 315,000 | 537,061 | 406,438 | ||
| Cash flow total | 105,126 | 1,376 | 184,376 | 130,624 | 406,438 | 0 |
Ensure you know when your money will be available, so that you won’t find yourself scrambling at the last second. The top part of the example spreadsheet plan details the sources of funding for the purchase. In this example, they include the proceeds from the sale of a previous house, savings in various banks, and a new mortgage. The bottom part outlines all the projected costs until you enter the new home. Note that in May the total cash flow becomes negative, which means the owner needs to arrange to take out part of the mortgage earlier than expected to avoid a major problem.
Consider as well the continued total ownership costs after purchasing the property. The larger the property, the larger the overhead (whether it’s municipal taxes, utilities, or just maintenance). Of course, the main question is whether you can afford the mortgage. There are no absolutes about what percentage of your monthly income you can afford to pay for your mortgage (or rent). Still, if you’re spending more than 25% of your income on housing costs, consider carefully if you can really afford it, especially given the fact that many Israeli mortgage payments continue to grow over the life of the mortgage. Just because a bank approves a specific mortgage amount doesn’t mean that you can afford it.
The Israeli mortgage market is very different than its North American counterpart. Bank financing is almost exclusively used for mortgages, as nonbank financing such as the secondary credit market of mortgage brokers (or private financing options) is not fully developed. When mortgage brokers advertise their services in Israel, they do not offer direct financing. Rather, their services are to act as intermediaries between you and the banking sector (see banking sector).
While there are some very specific nonbank financing options around, they are highly restrictive and not relevant to most people. Assume that only two sources of funds will be available to buy a property: your own capital (and that of friends and family as applicable) and bank financing.
The bank mortgage market is considered the most competitive of all banking services in Israel. They compete on price, service, terms, and innovative mortgage products, all of which give the consumer many types of mortgages to choose from (sometimes too many — mortgage brokers claim that there are over fifty different types of mortgages available!). The options can be overwhelming for the average person to consider or fully understand.
Because of the many choices, the language difficulties, and the bureaucratic nature of attaining a mortgage, many olim use mortgage brokers to facilitate getting a mortgage with the banks. Mortgage brokers typically charge 1% of the value of the loan (negotiable, and of course these fees can vary). They help you choose the right mortgage, negotiate the terms of the mortgage with the bank (and various fees like the bank origination fee, which is 0.25% of the loan, associated with all mortgages), and often will take care of much of the bureaucratic elements of the mortgage, including accompanying you to the signing at the bank to ensure that you understand what you are signing and that you receive what the bank committed to.
Mortgage brokers (especially those who also work as money changers) can often help you with exchanging currency for your payments in shekels and may be able to help you hedge against fluctuations in the exchange rate. These fluctuations can be serious. For example, if you sign your purchase price in shekels and then the shekel goes up by 10% before you make your payments, your purchase price has just gone up by 10%! Mortgage brokers can often help you to attain better terms than the average person can get when working by himself. But not always. If you know how to work the system and you have a good profile for getting mortgage approval, you can also get favorable terms. It will, however, take you time and energy. In most cases, the process works in the following way.
Start by speaking with your bank and several others. Put in an application for a mortgage in at least three banks, including your own. Once you’ve identified the type of mortgage you want, compare the terms the banks are offering and start negotiating. You’ll undoubtedly need to go back and forth multiple times between the banks to ensure you’re getting the best rate possible. Then, once you have decided on a bank, notify the other banks that you won’t be using their services. Usually, they’ll change their offer and you’ll start the process yet again. Welcome to the Middle East! If you want to do it yourself, there’s really no way around this exercise.
While there may well be more than fifty types of mortgages available in Israel, in reality they can be broken down into three main categories:
“Shpitzer” equal monthly payment mortgages
Variable rate mortgages
Equal principle payment or “keren shaveh” mortgages
“Shpitzer” mortgages entail monthly payments that don’t change for the life of the mortgage. They can be denominated in either shekels or foreign currencies and are amortized like most mortgages around the world, with the payment amount dependent on the size of the loan, the payment period, and the interest rate. These types of mortgages have fixed interest rates and are commonly referred to as “shpitzer loans.” There are several different types of these mortgages.
Standard fixed-rate mortgage payments start off at a fixed amount and would stay the same for the life of the mortgage, except that the principal amount is tied to the consumer price index (madad). As the consumer price index (CPI) or inflation grows, it will cause your loan principal to grow and that will cause your monthly payment to grow as well. In technical terms, it’s called a reverse amortized mortgage, as it allows you to initially take more than you can afford to otherwise. The critical part to realize is that your mortgage principal will most likely go up during the first half of your mortgage and your monthly payments will likely increase over the entire mortgage period. These types of mortgages are not commonly found outside of Israel.
In recent years, fixed-rate mortgages that are not tied to the CPI have become more common. Their advantage is in knowing exactly what your payments will be for the life of the mortgage.
Government-guaranteed mortgages have traditionally been structured as fixed-rate shpitzer mortgages with interest rates at 4 or 4.5%, plus the CPI. These mortgages were very favorable when interest rates were much higher, but nowadays with rates so low you can get better interest rates without taking the government-guaranteed loans (but you lose out on the guaranteed nature of those mortgages). The mortgage regulations set out by the Bank of Israel in 2011 required all new mortgages to have two-thirds of the mortgage structured as a fixed-rate mortgage for at least five years, however the Bank of Israel recently announced that it will reverse the current limits on variable rates in bank loans given for house purchases, allowing Israeli to take up to two-thirds of their mortgages with a variable interest rate. With interest rates currently hovering around 0% at the moment, do your due diligence regarding which structure suits you best.
Variable-rate mortgage rates can be adjusted at different periods of time during the life of the mortgage (rates change at intervals as defined by the bank), and when interest rates change, your payment will change as well. These loans are often linked to the CPI as well, so the same issues discussed above apply. If the variable rate loan is adjusted every five years, it will technically qualify as a fixed-rate mortgage to satisfy the Bank of Israel’s requirements from 2011 that two-thirds of each mortgage have a fixed interest rate.
Prime-rate variable mortgages also have variable monthly payments but differ from standard variable rate mortgages in that they are not tied to the CPI. As mentioned earlier, the prime rate that the banks offer their clients is approximately 1.5% above the Bank of Israel interest rate. When interest rates are low, as they are currently, your monthly payments can be low and your principal will go down monthly. However, the major risk is that when interest rates are rising, monthly payments can go up by large amounts to unsustainable levels. This danger was the main reason behind the Bank of Israel’s regulation restricting this mortgage type to only 30% of the total value of the loan, regardless of the value of the home.
Variable-payment mortgages can also be denominated in a variety of foreign currencies and can be linked to different interest rates. The most common interest rate is the LIBOR, or the London Inter Branch Offering Rate.
Equal principal payment or “keren shaveh” mortgages are structured differently from other mortgages in that you always pay back a monthly fixed percentage of the total principal value when you take out the mortgage. Monthly payments change as the variable interest rate component changes, but because you’re paying a high amount of principal back from the beginning of the loan, payments generally go down over the life of the mortgage. The advantage is that your principal gets paid off monthly instead of getting bigger and bigger. This means if you need to sell your home before the mortgage is over, you’ll only need to pay off a portion of your initial mortgage, unlike traditional Israeli mortgages where the principal has most likely grown.
Because the mortgage payments decrease monthly, if you can afford the high first payment, there’s a good chance (all other factors being equal) that you’ll be able to afford it over the life of the mortgage, as opposed to CPI-linked mortgages where high inflation can cause your monthly payments to grow slowly but steadily over the life of your mortgage.
Israeli banks are known to be substantially more conservative than their counterparts in many places around the world. Because of this, Israel’s financial system was able to weather the storm during the financial crisis of 2008. Banks in Israel require a much higher level of assurance that their clients will be able to pay back their loans, and as such place a major emphasis on current salary, and much less on investment accounts. The following documents are generally requested by the bank to approve your application:
Bank statements from the last three months
Paycheck stubs (telushim) from the last three months
Israeli Land Registry Document (nesach tabu or ishur zechuyot)
Proof of other income earned (such as a foreign tax return)
If you own a company, a recent tax return
Copy of teudat zehut or passport for all borrowers
Two most recent statements on any investment account
Beyond your own income, the bank will often ask for additional security for the loan in the form of other assets or having additional guarantors sign on the loan in addition to the lien that they place on the property. Having guarantors was the standard practice until recently, and while it’s not as common now, it is still in practice. Not having family in Israel can make finding guarantors a significant hurdle to overcome. Banks will also require you to take out life insurance for all parties to the loan and property insurance on the property.
If a borrower is declaring foreign source income or assets, banks will require you to produce your credit score report from your home country. Great care must be taken to avoid ruining your credit score before making Aliyah.
Shop around — price differentials can be significant even between the larger supermarkets chains. Know what’s cheaper where.
| Expenses | As a % | Fixed Fees |
|---|---|---|
| Purchase tax | 0% up to 1,026,660 nis. 3.5% on 1,026,660nis- 1,442,870, 5% above 1,442,870 nis | |
| Realtor fees | 1-2% plus VAT | |
| Legal fees | 0.5-2% plus VAT | |
| Registration | Few hundred nis | |
| Financial guarantees | Usually included in price | |
| Mortgage brokerage | 1% plus VAT | |
| Installation fees | Hundreds of nis per utility | |
| Bank origination fee | 0.25% of value of mortgage |
When purchasing a home in Israel, it’s important to understand how real estate deals are structured. Most purchases are closed by signing a contract that commits a buyer and seller to the sale and details the payment schedule and terms of the sale. Of critical importance is to ensure that the payment schedule outlined in the contract is reasonable, and that financing can be attained in time to make the payments. Getting a mortgage in Israel can take longer than expected, so give yourself lots of extra time — it often takes two to three months.
Once the contract is signed, the seller cannot sell the apartment anyone else (and your lawyer will register a he’arat azharah, a cautionary note, on the property to prevent this), but the transfer of ownership will only occur when the last payment is made. Unlike other Western countries, there are no mortgage contingencies in Israel, so if you can’t get a mortgage you still have a valid contract and you’ll likely lose your down payment. This is why getting pre-approval for mortgages is critical.
When purchasing a newly constructed apartment from a builder (kablan), payments should be made to the builder’s bank, which is providing a guarantee on money paid (this guarantee is necessary by law). Receiving a guarantee won’t save you from all potential damage if a builder goes bankrupt, but it will protect most of your capital in the long run. Never rely on a builder’s reputation to deposit money directly with them. The system has been designed to protect the purchaser. Trying to save a few dollars by circumventing the banks can backfire, as we have seen with high-profile bankruptcies like that of the large building contractor Hefziba.
You can expect to pay the following additional costs as part of your purchase:
Purchase taxes — the purchaser of the property pays 5% of the purchase price, though a reduced rate is available for purchases of residential homes when it’s your only home. When purchasing your only property, as of August 2020, the first NIS 1,744,505 of the purchase price is completely tax free, amounts from NIS 1,744,505 – 2,069,205 are taxed at 3.5%, and above that amount up to NIS 5,338,290 is taxed at 5%. Olim pay 0.5% up to NIS 1,734,225, and 5% above it. This tax concession is available for seven years after the date of Aliyah. Check with your attorney before using your rights — in certain circumstances, it can be cheaper to use the standard Israeli citizen rate.
Realtor fees range from 1 to 2%, plus Value Added Tax (VAT).
Legal fees range from 0.5% to 2%, plus VAT. When buying from a builder, you can expect to pay an additional 0.5% for the builder’s legal fees (according to proposed new legislation).
Registration fee: usually a few hundred shekels.
Bank origination or activation fee — usually 0.25% of the value of the mortgage is charged for opening the mortgage file.
Financial guarantees are usually included in the price quoted by a builder, but not always.
Mortgage brokerage fees, if you are using a broker (see above).
When buying an apartment from a builder, you’ll also be expected to pay an installation fee for gas, water, and electricity meters.
Familiarize yourself with the pros and cons involved in renting and buying a home.
Be realistic about the type of property and location you can afford. Remember that maintenance costs are directly proportional to the size of your home.
If relevant, familiarize yourself with the mortgage market. Decide if you require the services of a mortgage broker, or if you can work the system yourself.
Work out all the additional costs, over and above the price of the property, which you will incur with the transaction.
Ensure that you have the financial backing in place before you sign on the dotted line of any contract, and check that you’re financially prepared for every stage of the payment scheme.
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