Telling the Difference Between Various Mortgages
There are many types of mortgages with different linkage components, including:
Fixed-rate mortgage: This includes a predetermined monthly payment rate according to the amortization schedule (the Spitzer Table), where the correlation between the index-linked interest and the principal changes according to the CPI.
Adjustable-rate mortgage: Includes a number of predetermined periods where the interest rate changes according to the market index published by the Bank of Israel, plus an additional rate defined in the contract with the bank. The monthly payments change according to interest rates.
Prime: An adjustable-rate mortgage linked to the prime lending rate published by the Bank of Israel, plus an additional rate determined in the agreement with the bank. The monthly payments are adjusted each month in accordance with the advertised lending rate.
Foreign Currency Mortgage (US Dollar): The loan is paid and collected in NIS, but the principal and interest rates are linked to the foreign exchange trading rates set by the London Interbank Offered Rate (LIBOR). The monthly payments are adjusted each month. This loan is characterized by its flexibility and the option for commission-free early repayment as well as for switching to another type of loan.
Before you take out a mortgage, it's important to do market research among different banks, since you do not have to take out a mortgage from the bank where you have an account. Each bank offers different terms, and it's best to compare the fees, interest terms, and conditions for early repayment. It's also important to know the general market conditions, prevailing interest rates, and so on.
The Key: Finding the Right Mortgage for You
Set a convenient monthly payment rate: The optimal payment rate depends on your income, prior commitments, number of family members, and more, but the generally accepted monthly payment rate is no more than 25-30% of your net monthly income.
Monitor the market conditions: If the interest rate is low, we can assume that it will rise in the future, and vice versa. It is preferable to have a mortgage with a fixed interest rate.
Combine different methods: Today it's possible to combine multiple mortgage types into one loan, and therefore enjoy the security of a fixed monthly payment, while also being linked to changing market conditions.
Plan ahead: If, for example, you plan on making an early repayment by selling another apartment, carefully check the bank’s early repayment terms.
Follow the bank supervisor's recommendations: The Bank of Israel’s general supervisor periodically publishes guidelines, restrictions, and recommendations. It's recommended to keep track of them.
*The information on this site does not constitute a recommendation for taking out mortgage loans, financial advice, or an opinion of any kind.