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As part of our ongoing series about Mortgages in Israel, this time we look at pre-approvals and Interest Rates.
Pre-approvals
The bank provides pre-approvals for a mortgage application as a percentage of the purchase price or the appraised value - the lower of the two. For this reason, it is recommended to obtain an appraisal prior to signing the purchase contract.
Pre-approvals are granted based on the information which the borrower provides such as bank statements and income documentation as well as being based on credit checks which the bank does on its own (BDI). Should the details of the borrowers loan application change between the time that a pre-approval is given and the time that the mortgage must fund - the bank may change the terms of the approval. As an example, if the borrowers' income decreased, and they no longer have sufficient income to qualify for the loan, the bank may reduce the loan amount in order to comply with Bank of Israel regulations regarding maximum allowed DTI (debt-to-income ratio).
Interest Rate Locks
Interest rates are locked for 12-24 days from the time that a pre-approval is issued depending on the bank. Releasing a portion of the total mortgage approved does not lock in rates for subsequent tranches of funding for fixed rates however it does lock in the spread on variable rate mortgages. Variable rates are approved as an “Index” + “Spread”. The effective interest rate is set on the day of funding. As an example, for a 5 year variable unlinked mortgage, the pre-approval will show Index + 2%. If the index is 2.25% on the day of funding the mortgage will be set at 4.25% for the next 5 years.
Prepayment Penalties
Shekel Mortgages linked to variable rates, where the rates adjust more often than once a year (such as mortgages linked to NIS Prime) are not subject to prepayment penalties.
Fixed rate mortgages in NIS are subject to potential prepayment penalties. Penalties for early repayment (including in the event of sale of the property or refinance of the mortgage) are levied in the event that interest rates at the time of repayment are lower relative to the time when the mortgage was funded.
Certain mortgage products, (e.x. 5 year variable) have periodic “exits” where the mortgage can be paid down without penalty regardless as to where interest are at the time of repayment.
Pre-payment penalties are calculated at the time of repayment based on the balance of the mortgage, interest rates, and time until the loan fully amortizes or until the next exit (if applicable).
Foreign currency mortgages are not subject to prepayment penalties.
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Funding of the Mortgage (Purchase)
When taking a mortgage for the purpose of purchasing a property, the bank will generally fund the mortgage only once all of the borrower’s equity has been paid. In the event that the borrower would like the bank to fund the mortgage prior to all of the equity being paid special approvals can be obtained.
The Mortgage Process
It is important to note that there are a number of steps involved in funding a mortgage. This includes, but is not limited to: ascertaining how to best structure mortgage financing for your specific situation, negotiating terms with the numerous lenders in Israel, obtaining a pre-approval, obtaining documentation required for an appraisal from the relevant municipal and government offices and/or housing companies, expedite requests from the seller’s attorney to the bank’s legal department for amendments to lien documentation (התחייבות מוכרים), collect executed documentation from the seller, obtain special approvals on behalf of the borrower from the bank (when necessary), record the “Cautionary note” in favor of the bank in tabu, record a “Mishkun” in Rasham Mishkonot, organize property and life insurance policies, renew approvals prior to funding, coordinate opening bank accounts for the borrowers when necessary and coordinate times for the borrower’s appointed POA to sign on the mortgage file (for overseas borrowers) and ensure that the terms of the loan listed on the mortgage agreement are correct.
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If you are looking for assistance in navigating the mortgage process in Israel, while securing preferred interest rates and terms, call us today to schedule a complimentary consultation with a First Israel mortgage consultant. We are committed to saving our clients time and money.
First Israel Office: 02-625-2555
Find us on the web at: https://www.firstisrael.com/