A General Outline of How Mortgages Work in Israel

The Israeli mortgage system operates differently from many other countries, with unique regulations, requirements, and structures that both residents and foreign buyers need to understand. As the Israeli real estate market continues to evolve, particularly following the challenges and opportunities of recent years, understanding how mortgages work has become crucial for anyone looking to purchase property in Israel.

Basic Structure of Israeli Mortgages

A mortgage is basically a loan. However, unlike other loans, in a mortgage, the property is mortgaged to the bank until the completion of the payments. This fundamental principle remains consistent across all Israeli banks, but the specific terms and conditions vary significantly based on the borrower’s status and the property type.

In Israel, all loan tracks are typically offered for a maximum term of 30 years, provided the loan is settled before the borrower reaches the age of 80-85. While not a law, this age restriction is a unique feature of the Israeli system that borrowers must consider when planning their mortgage timeline.

Eligibility and Down Payment Requirements

One of the most distinctive aspects of Israeli mortgages is the different treatment of various borrower categories. The system distinguishes between Israeli citizens, new immigrants (olim), and foreign residents, with each group facing different requirements and benefits.

Israeli Citizens

For a first residential home, Israeli residents may borrow up to 75% of the property’s value. For additional homes or investment properties, financing is capped at 50%. This means that an Israeli buyer has to show that he/she has the capability to put down a minimum of 25% of the purchase property for their first home purchase.

Foreign Residents

Foreign residents (non-Israeli citizens) face a minimum down payment requirement of 50%, meaning they can only obtain financing for up to 50% of the property value. This significantly higher down payment requirement compared to Israeli citizens reflects the banks’ risk assessment and regulatory requirements for non-resident borrowers who may have less stable ties to the Israeli economy.

New Immigrants (Olim)

Some banks offer special mortgage programs for new immigrants, which may include flexible underwriting or interest rate discounts under certain conditions. However, minimum down payment rules still apply. The exact benefits vary by bank and depend on how long the person has been in Israel, but these programs are designed to help new immigrants establish themselves in the country.

Income Requirements and Qualification Criteria

Israeli banks employ traditional underwriting standards when evaluating mortgage applications. Most use the criteria of 33% monthly mortgage payment to net income ratio when qualifying debt to income ratios. This means that your monthly mortgage payment should not exceed 33% of your net monthly income.

However, there are other factors that can affect the banks’ decisions. Qualifying rates, typically 2-3% above the adjustable rate, are used to stress-test borrowers’ ability to handle potential interest rate increases. This conservative approach helps ensure borrowers can manage their payments even if interest rates rise.

Interest Rates and Market Conditions

The Israeli mortgage market has experienced significant fluctuations in recent years. The average interest rate for mortgages in Israel stands at around 3%–4%, though these rates can vary based on the specific loan type and borrower qualifications. Fixed rate 20-year mortgage stand at around 2.85% on average and fixed rate 15-year mortgage at approximately 2.60% on average as of recent data.

The current market environment has been influenced by various economic factors. Bank Leumi, one of Israel’s two largest lenders, reports a profit of almost NIS 10 billion ($2.7 billion) in 2024 as it cashed in on high interest rates paid by mortgage and loan holders, indicating that rates have been at profitable levels for lenders.

Types of Mortgage Tracks

Israeli mortgages typically combine multiple “tracks” or components, each with different interest rate structures. Common tracks include:

• Fixed Rate Tracks: Offer stability with unchanging interest rates for the entire term or a specified period
• Variable Rate Tracks: Tied to the Bank of Israel’s base rate and adjust periodically
• Prime Rate Tracks: Linked to the bank’s prime lending rate
• Index-Linked Tracks: Adjusted based on the Israeli Consumer Price Index

Most borrowers combine several tracks to balance risk and potential savings, creating a diversified mortgage portfolio.

It’s worth noting that the financing percentages mentioned above (75% for Israeli citizens, 50% for foreign residents) represent maximum limits. Many financial advisors recommend putting down more than the minimum required, as a larger down payment reduces your monthly payments, total interest paid over the loan term, and overall financial risk.

Unique Features of Israeli Mortgages

Early Prepayment Penalties

The penalty is assessed in the event the prevailing rate at the time of prepayment is lower than the rate at the time of the mortgage funding. Basically, the bank calculates the loss of interest that they are incurring because they can only lend out the prepaid funds at a lower interest rate. This system protects banks from interest rate risk but can be costly for borrowers who want to refinance or pay off their mortgage early.

Market Size and Trends

The average mortgage size in Israel is approximately NIS 1 million and the average monthly mortgage payment approximately NIS 4,000–5,000. These figures reflect the high property prices in Israel, particularly in major cities like Tel Aviv and Jerusalem.

The real estate market has shown resilience despite recent challenges. The strength of the Israeli real estate market during 2024 surprised many, as home prices rose about 8 percent during a year defined by a multifront war and general uncertainty about the future.

The Application Process

The mortgage application process in Israel can be complex and time-consuming. Banks typically require extensive documentation, including:

• Proof of income and employment
• Bank statements
• Tax returns
• Property appraisal
• Legal documentation for the property

Working with Professionals

Given the complexity of the Israeli mortgage system, many buyers work with mortgage advisors or brokers who understand the intricacies of different banks’ offerings and can help navigate the application process. These professionals can be particularly valuable for foreign buyers who may not be familiar with Israeli banking practices and regulations. Contact us to get in touch with professional and reliable mortgage advisors.

Conclusion

The Israeli mortgage system offers various options for different types of borrowers, but it requires careful navigation due to its unique features and requirements. Understanding the distinction between borrower categories, the importance of down payment requirements, and the various mortgage tracks available is essential for anyone looking to purchase property in Israel. With proper planning and professional guidance, borrowers can secure financing that meets their needs while managing the risks associated with this complex but accessible market.

The key to success in the Israeli mortgage market is thorough preparation, realistic expectations about down payment requirements, and working with experienced professionals who can guide you through the process. As the market continues to evolve, staying informed about regulatory changes and market conditions will help ensure you make the best decisions for your specific situation.