The billions in mortgage loans that banks dish out every month have created the impression that buying an apartment is the most convenient way to get money from a bank – at modest interest rates to boot. Just show three pay slips and be ready to take out life insurance. But many families discover that the road ahead is an obstacle course that they cannot always traverse.
One-third of Israelis are totally excluded from the mortgage market, while others face restrictions or pay rates several times higher than those of an average mortgage.
The Y. family from Givat Ada south of Haifa had a modest dream typical of a young family with two small children: to move from their rented apartment to a home of their own in the same town. Even back in 2015 this was a feat for a family with a modest income, even given the prices in the country’s outskirts. But they eventually found exactly what they were looking for, a 45-square-meter (485-square-foot) duplex for 1.21 million shekels ($375,000), a bit less than they expected.
Dana (not her real name) says they bought the place from a man who had purchased it from the state-owned housing company, Amidar. “He tried to sell it for a long time,” she says. “We knew there was a small problem with the tabu [the property’s registration at the land registry], but we didn’t check into it much, figuring it wasn’t a big deal.”
The bank had discovered that the home’s floor space as recorded in the registry didn’t match the actual size. It turned out that Amidar had built 10 fewer square meters and added them to the property next door. Because of the discrepancy at the land registry, there was no mortgage – and no new house for the Y. family.
The ostensibly simple process of changing the tabu details proved complicated because the family needed the approval of the Israel Land Authority, the owner of the land. The authority was supposed to approve Amidar’s tweak when it had happened, but hadn’t been aware of the change.
“They hassled us, sending us from one agency to another, from Amidar to the land authority to the land registry,” Dana says. “I threatened to sue the authority, but ultimately I had to pay someone to approach a very senior official there to try to speed up approval. In the meantime, we had to pay the seller.”
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The couple approached Aviram Tenenbaum, a mortgage consultant and owner of the company Pardes Financial. He suggested a creative solution: The Y. family should mortgage an apartment belonging to Dana’s mother, and use the money on the home they wanted to buy.
“That move ultimately let us purchase the apartment, but I wouldn’t recommend that route to anybody,” Dana says. “The loan was for a mortgage, but it was a short-term one at high interest, because we thought the problem would be resolved in a few months. The apartment was being renovated, so we had to pay rent at the same time, sometimes asking the bank for grace periods to postpone payments.”
After a delay of two years and heavy expenses, the couple managed to get the registration changed and swap the mortgage on Dana’s mother’s house for a regular mortgage.
Yesterday’s tax loopholes create today’s troubles
The Y. family isn’t alone. An estimated 100,000 homes in Israel aren’t properly registered, or are in the books in a way that blocks a mortgage. When the owner tries to sell, and mainly when the buyer seeks a mortgage, problems crop up.
This is what happened to the M. family from Tel Aviv, two parents and three children living in a rental apartment. In 2019 they sought to buy an apartment on Neveh Sha’anan Street near the Central Bus Station. This neglected area is not where families with children generally look to live, but many people believe the neighborhood is up and coming, in part because of the development plans for adjacent streets, and apartment prices have been climbing there.
The family was interested in a four-room, 85-square-meter apartment. The asking price, 2 million shekels, would have been a bargain for an ordinary apartment. But like many apartments in older parts of Tel Aviv, this one wasn’t registered at the land registry.
Instead, the building was registered under a type of joint ownership among all the tenants; the building was owned by a company from which the tenants leased their apartments.
Gabriela, the wife, says this was done to avoid paying taxes. When selling such apartments, tenants would transfer their shares to the buyer without having to pay real estate taxes.
This loophole no longer exists, but the ownership structure is still complicated and almost impossible to resolve. This certainly was the case when the M. family applied for a mortgage.
To buy an apartment in this building, not only do you have to find a way to register it under your name, you often have to pay outstanding debts linked to the company.
Homeowners in such a situation generally don’t choose to take part in such a tortuous journey to sell their apartment unless they run into financial straits. In this case, when the buyers sought a mortgage, the bank wasn’t completely put off by the registration problems, but only agreed to finance 50 percent of the apartment’s value, not the usual 75 percent.
Without the funds the family had counted on, they couldn’t go through with the deal. The bank didn’t insist on a standard registration at the land registry as a condition to provide full financing, but it did require the standard appraiser’s report. The deal could have fallen through at this stage because the appraiser on behalf of the bank wanted to see a document stipulating the apartment and its location, as well as a document linking it to the owner.
What saved the day was a crumbling lease deed found almost by chance in the seller’s attic. The property was obviously not registered at the land registry but the registry had the number of the lease, which detailed the apartment’s location.
With a bit more urging and help from Tenenbaum’s connections, the family got the bank to provide the full funds needed to complete the deal, though in the meantime they decided not to move to a neighborhood that was not yet gentrified. They put the apartment up for rent. “We spoke with people living there and discovered that it wasn’t a good place for raising children,” Gabriela says.
The Arab community has it the worst
Mortgage problems, however, go beyond a few hundred dilapidated apartments in older city centers. In the Arab community, thousands of families are blocked from obtaining a reasonable mortgage.
This is one of the most significant barriers separating Jewish and non-Jewish Israelis, leaving the latter unable to buy an apartment at market prices.
Only 2 percent of mortgages in Israel go to Arab Israelis. Until just a few years ago, none of the large Arab towns had more than one bank branch. The situation improved somewhat after the banks discovered the Arab community as a market for loans, but it’s not just the banks.
Ahmad Mahajna, a former manager of a Bank Hapoalim branch in Umm al-Fahm with a graduate degree in business, sat on a Bank of Israel committee for reforming the credit market.
“One of the main reasons for the economic inferiority of Arab society is the lack of access to the mortgage market,” Mahajna says. “Most assets and land are registered in the name of an entire village or of former owners.”
Without proper registration, banks don’t want to make long-term loans. Most new dwellings in Arab locales are built by the families themselves using regular bank loans – expensive short-term credit that poses a big burden on borrowers.
“At the beginning people borrow from their family and friends, from whoever they can,” Mahajna says. “After construction is finished, you approach the bank, but then you can’t get a mortgage, only an all-purpose loan at 7 or 8 percent interest, almost four times as high as regular mortgage rates.”
This heavy burden often results in delayed payments, which send interest rates higher.
“The image created is that all Arab borrowers are risky,” he says. “This is a large debt burden on the whole Arab community that impacts all aspects of life. It cultivates an underground economy and a gray market for loans, some of them relying on organized crime groups, contributing to crime in the Arab community.”
Is the problem only with properties where registration is incomplete?
“Not only. In the Arab community there’s a basic wariness about taking a bank loan, stemming from concerns about the repercussions of a default. Many people are suspicious of the system and don’t want to get in trouble.
“The dire shortage of land for construction has led to a lot of illegal construction on agricultural land over the years, and that too can’t be registered. In many cases, land could be registered, but people want to avoid the high costs.
“Even when there’s a chance of getting a mortgage or a regular loan based on guarantees and pay slips, the financing is limited. Salaries in Arab society are dozens of percentage points lower than in society at large, and in many cases salaries are paid without pay slips.”
The government has announced campaigns for registering properties in Arab towns and villages. Have you heard anything about that?
“I haven’t seen this and I haven’t heard about people going to land registry offices.”
Even so, what can the government do?
“I’ve talked about this with people at the Bank of Israel. You have to develop unique products suitable for the Arab community that will let people get credit under reasonable conditions.
“At least in part of the credit market, the government should get involved and give guarantees to reduce the risks the banks perceive, risks that result from registration problems. By advancing the Arab community the government will gain much more than it spends on such guarantees.”
The ultra-Orthodox community
The Arab community is the largest group that suffers credit discrimination, partly based on erroneous beliefs about the rate of loan defaults. But this problem also affects other groups in Israel, some that aren’t used to being discriminated against.
The main problem facing the ultra-Orthodox community when it comes to taking out mortgages is the low incomes of many families and difficulties proving income or the ability to repay a loan, even when the family has a steady income.
According to Baruch Feinstein, a mortgage consultant in the ultra-Orthodox, or Haredi, community, “many people’s income in this community isn’t listed on pay slips. Some banks that know this segment know how to handle this. For example, married ultra-Orthodox students receive a regular cash stipend.
“This doesn’t need to be reported to the tax authorities since it’s not a salary, but many banks don’t take this into account. Also, there are many people who, even at an older age, depend on their parents for support. In these cases, banks will provide a mortgage commensurate with income, requiring the parents to serve as guarantors.”
According to Feinstein, parents as guarantors is a very acceptable solution in the ultra-Orthodox community, but the parents often fall short themselves.
“Parental incomes are also limited, and families are large,” he says. “You can give such guarantees to one kid, maybe two or three, but not five or six.”
The housing shortage, mainly in large Haredi cities, leads to a lot of illegal building, complicating the lives of buyers. Illegal construction beyond what zoning rules permit “automatically reduces the appraised value of a property and the mortgage you could obtain when buying it,” Feinstein says.
“The bank’s property assessor deducts the illegally added floor space from the value of the home. ... The result is a significantly diminished mortgage.”
A problem unique to the Haredi community, which suffers from severe overcrowding, is when two young families share an apartment. In such cases, Feinstein says, “banks can’t mortgage one apartment to two couples, because if one of them leaves, the entire mortgage has to be refinanced.”
As he puts it, “The big advantage of Haredi society is the existence of donation-based charities that make large loans of as much as 100,000 shekels for up to six or seven years, with no interest or inflation linkage.
“You can rely on this as a complementary solution, but it’s not for everybody. The Haredim have only a few large charities that can offer large sums, and borrowers have to belong to the sub-segment of the community managing the charity.”
Strategies for older Israelis
When the late Benjamin Ben-Eliezer, a government minister for three decades, was asked why he financed a fancy home with a loan from a businessman he was close to and not a bank, he explained that banks didn’t grant mortgages to older people. This wasn’t accurate, because banks aren’t allowed to discriminate based on age.
But the reality is more complicated, since banks can demand that a borrower take out life insurance, which saves the bank the hassle of going after the heirs if the borrower dies before the loan is repaid. Insurance companies tend not to offer life insurance to older people.
“A customer over 60 seeking to take out life insurance for 20 years to get a mortgage may need to pay the insurance company 300,000 shekels,” says mortgage consultant Nofar Yaakov, who specializes in mortgages for older people. “He or she could take the mortgage, but the insurance costs make the deal not worthwhile.”
Customers can have life insurance up to age 80, or 85 in rare cases.
“The bank can demand life insurance, but it does not have to, and when a customer is older, there’s room for negotiation,” Yaakov adds. “With a good customer, the bank may forgo this demand, often without raising the interest on the loan.”
When older people have difficulties obtaining a regular mortgage, Yaakov suggests they try for a reverse mortgage. This transfers the property rights to the bank, so if the client dies before repaying the entire amount, the house is sold and the bank receives the missing chunk. Interest rates in such cases are much higher than with ordinary mortgages.
All told, consultants say most people in Israel can get a loan to buy a home. The kicker is the terms: The price, the percentage that can be borrowed, and the repayment period. The difference in financing ranges between 75 percent of a property’s value for an ordinary mortgage and 40 to 50 percent for less standard scenarios.
Furthermore, while interest rates on a regular mortgage range between 2 and 3 percent, for others borrowing costs can be as high as 8 and 12 percent, mainly in the Arab community. The chances of getting a loan for 20 years or more are almost nonexistent for people who can’t obtain a regular mortgage. For them, loans are shorter, and monthly repayments are higher as a result.