Finding the right home at the right price and being able to afford a mortgage isn't necessarily all it takes to sign on the dotted line: Location is another factor that could torpedo the deal.
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Banks divide mortgage risk into two components, the type of borrower and the quality of the property, and much of the property's quality is a function of location. Banks consider a good location safe because it makes it easier to resell the property in the event that the borrower defaults on their mortgage payments.
Properties over the Green Line are considered by banks to be on the riskier side of the equation, however, and banks won’t provide more than 60% financing for buying a home in a settlement, according to Idan Olentuch, CEO of the Olentuch mortgage consulting firm.
"The bank's security is the property, and with a house in a settlement there's the risk of not knowing what might become of it in the future," explains Olentuch. Besides demanding a high margin of equity, the bank can also ask for a higher interest rate, he adds, but it's easier to negotiate this down than to negotiate an increase in the percentage of financing.
Difficulties in mortgage financing are also one of the reasons properties across the Green Line are cheaper. This means the absolute sum needed in equity might not be much different on either side of the line.
"I've run into some couples who couldn't buy homes across the Green Line, and there were some who breached their contracts with the builder because they couldn't get the money from the bank," says Olentuch. "But there are also subcategories across the Green Line. Areas like Ariel [which are likely to remain in Israel in the event of a future accord with the Palestinian Authority] are considered low risk and there are hardly any difficulties."
"There is the question of what happens in the eventuality of a withdrawal," says Avi Gabbay, owner of the Better Choice business and finance consulting firm. "The bank might find itself with houses across the Green Line and it isn't clear what compensation it would receive from the government – if any at all. In my opinion the risk is very low. There was no instance of withdrawal from Yamit or Gaza in which the government didn't pay."
What's more, says Gabbay, "properties across the Green Line are in the Jordanian land registry. The Jordanian land registry, managed by the Civil Administration, is a niche that not all banks, or bank branches, know how to work with."
Tel Aviv too
Gabbay adds that there is risk in Tel Aviv too, where properties seem to be the most secure. "In Tel Aviv there is actually concern over high-percentage financing because transactions are large and the risk of prices dropping is greater. When prices fall, the high-end market usually gets hit first."
There are plenty of areas within the Green Line where getting a mortgage can be difficult, such as areas where land values are extremely low. "The lower the property value, the greater the problem with the customer's credit," says Olentuch. "There is a correlation between the price of the home and the borrower's financial strength."
But if one branch refuses a mortgage, that doesn't mean the customer should give up. "There are creative ways to approach the banks," Olentuch says. "You need to know who to talk to, which branch to go to, and how to submit the paperwork. Not all branches are run the same way, even if they belong to the same bank. Each branch has its own targets, including the number of mortgages it needs to sell. A branch that's short of its target, for instance, has more motivation to help out with a mortgage."
That said, there are entire neighborhoods in Tel Aviv that the banks generally avoid, such as the Shapira and Hatikva neighborhoods in the south.
"These neighborhoods have property registration problems," explains Olentuch. "There is no division of land into housing units. No specific property can be identified with its owners. So if the bank ever needs to foreclose, it will face a legal problem establishing ownership in order to sell it."
According to Gabbay, hardly any transactions occur in the southern neighborhoods of Tel Aviv due to this financing hurdle. Banks simply can't mortgage a property there as collateral because of the problem with registration. The deals that are arranged are often done with a high level of equity and without bank participation.
"The Hatikva quarter is like an Ottoman land partnership – many owners and no precise division among them," explains Gabbay. "There are no sharing agreements between the various homeowners. The transactions are very complicated and banks don't like dealing with them."