basic information to have in hand, to know what questions to ask. However, this does not take the place of a lawyer who is knowledgeable in this area. When considering a specific apartment, and your own financing needs, it is important to consult with a lawyer regarding the specific property and your own specific needs. Good Luck!
Until now, there has been no title insurance as there is in the States. The option of title insurance is still very new and untried. In any case, it is of the utmost importance to have the sellers’ rights to the apartment clarified.
Land in Israel is divided into privately owned property and land owned by the State, the Churches, and the Jewish National Fund.
Privately owned property is registered in the District Lands Registry Offices (Lishkat Rishum Mekarke’in) around the country and is commonly known as “Tabu”. This is the simplest form of ownership to clarify. The record also indicates whether there are any liens, mortgages, easements, rights of use and/or passage, appropriations by public authorities, etc. on the property. It is also possible to do initial checks in the Lands Registry Files on-line through a number of sites (for a lesser fee than at the Tabu office), however only the Extract of Title (Nesach Tabu) with the original stamp of the Lands Registry Office is considered “official”.
Property which is owned by the State or the Jewish National Fund (JNF). These properties are administered through the Israel Lands Authority (Minhal Mekarkei Yisrael). The property is leased to apartment owners, generally for periods of 49 years, renewable at the end of each term. There is an annual rental fee for the lease period, however, in new construction this is capitalized and paid for at the beginning of the period. Approximately 95% of the property in Israel is controlled by the Minhal.
Leaseholds may be registered in the Tabu, or may not. Often, the registration is in the hands of a housing company, usually the company which built the project.
In this case, the housing company (Hevra mishakenet) acts as a “mini- Tabu” regarding recording ownership, mortgages, liens, etc. The newer the project, the more likely that the rights are registered with the housing company.
In the past few years, however, the Minhal has begun to “crack down” and demand that the housing companies complete registrations into Tabu, or risk sanctions from them. As a result, more of these properties are being registered into Tabu. In addition, changes in legislation have allowed transfer of ownership title to owners of apartments in buildings, but not private homes. There are limitations on this ownership when it comes to selling to foreigners.
When buying “on paper” from contractors, it is important to check that their contracts with the Minhal are in order.
These properties are usually registered in the Tabu offices. The Israel Lands Authority (Minhal Mekarkei Yisrael) and/or the JNF often lease these lands and have apartments constructed on them. The purchasers of the apartments hold a sub-lease from them. The leases are expected to be renewed every 49 years, as in the case of regular leaseholds from the Minhal or the JNF.
However, there are properties where the leasehold is directly from the Church, without an official intermediary. These leaseholds are considered to be less attractive, because no one knows what will be the case as regards renewals, where there is no official body, such as the Minhal, to negotiate the renewals.
When purchasing an apartment, everyone pays Land Acquisition Tax (mas rechisha). This is a graduated tax, based on the cost of the apartment, as well as the personal status of the person buying it. These rates are influenced by a number of factors: whether this is the buyer's only apartment, if the buyer is not an Israeli resident, etc.
In addition to changes to the Land Acquisition rates, January 1, 2014 brought major changes in the availability of exemptions from Capital Gains Tax. Foreign residents no longer have immediate exemptions from capital gains taxes, nor Israelis on investment apartments.
Because of the changes to the tax structure, it is even more important to make certain that you are properly represented and receive legal advice.
Real Estate Agents
A special law was passed in 1997 overseeing and regulating the work of Real Estate Agents. At present, an agent must pass a licensing exam in order to work in the field and expect to be paid. In addition, there must be a signed agreement between the client and the agent spelling out which properties were shown, what the expected fee will be and when it will be paid. The law also specifies that the agent is entitled to his/her fee only if they were instrumental in finalizing the deal. This last requirement is the reason that many agents are insistent that the negotiations be conducted in their offices, or that they are present for any negotiations and the signing of the contract.
The customary commission in Israel is 2% + VAT of the purchase price from both the seller and the buyer, not an insignificant sum if the agent represents both sides. That doesn’t mean that you cannot negotiate a different arrangement with the agent as to amount of the commission and the manner in which it is to be paid.
Mortgages and Government Grants
The Israeli Government gives subsidized mortgages to certain select groups in society in order to encourage home ownership. The amount of the loan and its terms are determined by a “point system.” New Immigrants automatically get extra points to ensure that they meet minimum levels for getting the loans. Army and/or National Service also increase the number of points a person receives, as does coming from a large family. The mortgage banks can tell you what your “point” status is and on what terms you can get a government loan.
While in the past, the Government Loans (“zakaut”) were considered to have the best terms, this is no longer the case. Often, especially for what are considered “good” clients, banks will give terms that are better than those of the zakaut loan.
Banks also make loans from their own funds. These can be in NIS or foreign currency, or linked to the dollar/euro/sterling. The best loans are those that are considered “principle only” mortgages, as the interest payments decrease over time and the principle can be repaid without penalty. “Principle only” loans are typically linked to the LIBOR and/or prime rates, with an additional fixed interest. If you decide to take a standard NIS mortgage, it is better to negotiate a fixed interest rate, rather than a variable one. When considering mortgages with a variable rate, remember that the lower the interest at the beginning of the loan, the more it can rise over the course of the loan. It is best to try and limit the number of times the rate can be adjusted over the course of the loan.
Also, bear in mind that the mortgage banks are all looking to increase market share of the mortgage market. They assume that if you take their mortgage from them, you will bring other business to the bank, which increases the fees and interest they will collect from you. In fact, most mortgage banks currently insist that you open an account with them through which you repay the mortgage. The bottom line: make the rounds of the banks and see who offers what and what the best terms are. Then, make the rounds again, indicating what that best offer is and see if one of the other banks will match and/or give even better terms. You can sometimes save almost 1% on interest by negotiating. BUT remember that you do have to decide at some point which bank to go with. Also, don’t forget to ask your lawyer which banks are easier to work with. It doesn’t matter how good the offer is, if the particular bank is known for being difficult to work with, which may cause your mortgage payment to be delayed.
There are also professional groups that have negotiated better terms for their members, such as teachers, public service workers, etc. Find out from your place of work if such arrangements are available.
Many mortgage banks will require you to open an account with them through which the loan will be repaid.
Additionally, several of the insurance companies now make loans secured by mortgages.
As regards seniors who own their own homes and need financing: several of the banks are now making “reverse” mortgages, which allow utilization of the equity in the apartment, and the repayment is usually made when the apartment is sold.
In the past few years, a market for mortgage brokers has developed. Many of these brokers worked at the various mortgage banks and now represent buyers looking for a good deal on the mortgage. The broker gets paid a fee by the buyer. Ask for recommendations.
As part of efforts to reduce the cost of housing by reducing investment incentives, the Bank of Israel has issued new directives regarding mortgages for new purchases. In the case of Israelis purchasing their first homes, the mortgage cannot exceed 60% of the value of the property. In the case of purchases by foreigners and additional apartments by Israelis, apartments which are considered "investment apartments," mortgages cannot exceed 50% of the value of the property. Banks will insist on an appraisal of the property to determine value and will not rely on the contract price, unless buying on "paper".
Here are some of the types of mortgages and types of interest which are available in Israel. (Explanations courtesy of Yediot Aharonot – Mammon 30/10/12):
Prime interest: this refers to the Israeli prime rate, not American. The Israeli Prime is set at 1.5% above the interest set by the Bank of Israel. This type of interest provides the base for loans or deposits with variable rates. When the Bank of Israel rate changes, so does the Prime.
Variable rate mortgage based on Prime: Mortgage where the rate of interest is set according to the Prime rate. This type of mortgage is usually not linked to the Cost of Living Index (madad), and it is best taken when the prime is low. Usually, there are no special fees for early repayment or in recycling the mortgage.
Variable rate mortgage linked to the cost of living index (madad): In this case, the outstanding principle is linked to the madad, and the interest rate changes at specific points in the life of the mortgages, as predetermined at time mortgage is taken (e.g., every 3 years, 5 years, etc.). The interest is set as a spread from an external known index to which it is pegged, like the Bank of Israel rate. This type of mortgage may be beneficial when the interest rates are expected to drop.
Fixed interest, unlinked mortgage: Here the interest rate is fixed for the term of the loan when the client takes the mortgage and does not change over the life of the mortgage. There is no influence of the madad or increase in the Bank of Israel rate. However, the interest rate is usually significantly higher than the other types of mortgages.
Over the past year, the Bank of Israel has further regulated the percentage of the value of a property which may be financed by a mortgage. In any event, the maximum, which is for first time purchasers, is 75%. Consult with your lawyer and mortgage banker.
Price and payment
At this point in time, it is rare for the prices of apartments to be quoted in dollars. Instead, prices are posted in shekels. Bear in mind that you don't fall into the trap of calculating back into dollars, since the final price will fluctuate in any foreign currency, based on the rates of exchange.
When buying “first-hand” from a contractor, the contract price set will be in shekels (by law). The cost of the apartment will also include VAT. The contract will also indicate whether the payments are to be linked to the Consumer Price Index (“madad”) or the Index of Building Materials. All outstanding monies are linked. Therefore, before each payment is made, it is important to contact the contractor to make certain that you pay the full amount, including the linkage. Unpaid linkage fees become part of the principle, and late fee surcharges are common.
The second-hand market is priced in NIS and does not have VAT attached, unless the seller is a corporation.
Guarantees and Securities
When purchasing a second hand property, it is customary to register a lien on the apartment once the down payment has been made. The lien might be registered in Tabu (depending on the type of registration), with the housing company and/or Minhal, and at the Registrar of Liens (Rasham HaMashkonot). The final payment to the sellers will then only be made upon transfer of title and possession of the property.
In the case of purchases of new construction, the law provides specific securities which the contractor must provide the buyers. Because these provisions only go into effect when the buyer has paid 15% of the purchase price, most contractors – and certainly the buyers – insist that the first payment be no less than 15% of the purchase price.
The most common form of security from contractors is a bank guarantee. The guarantee is issued following every payment, provided that the buyer makes all his payments into a specified account for that building project. The funds in the account are mortgaged to a specific bank which is financing the project for the contractor. The bank then releases the funds to contractor according to a specified schedule based on progress of the construction. The “profit” only gets released to the contractor when the project is completed with a Certificate of Occupancy and the buyers get keys to their apartments. It is critical that you only make payments into the account specified, even if the contractor offers discounts for cash or asks that the money be deposited into another account. Funds not deposited into the project account will not be granted a bank guarantee.
Since the collapse of the Heftzibah Construction Company, the public has become more aware of the importance of insisting that payments be made according to the contract and receiving the guarantees. The Ministry of Housing and Construction has formalized new regulations and the Knesset passed specific legislation aimed at protecting the public in their relationships with the contractors. It is critical to make certain that the contractor of the specific project you are interested in is following all the regulations and issuing all the relevant guarantees. That is why having your own representation is of the utmost importance. Usually, purchasers are given a booklet of vouchers with which to make payments. These specify the account number of the project, from which the bank guarantees are received.
Additional expenses for the purchase include legal fees, fees from the mortgage bank for opening a file, an engineer to inspect property before contract, title registration, etc. A good rule of thumb is to expect additional unanticipated costs of 10-15% of the purchase price. That is why you should never stretch yourself to the limit for the purchase price alone, given all the other payments which must be made.
AACI wishes to thank Deana Fein, Adv. for providing this information.