Mortgage guarantors in Israel

Everyone know what are mortgage guarantors: family or (very) close friends that are willing to co-sign your mortgage, and share some of the risk.

Everyone, except the Israeli banking system.

After too many stories of guarantors that disappeared leaving their friends and family in a dire financial situation, the Israeli regulators have decided to put an end to this system, and cancel the default necessity for guarantors at all mortgages.

Instead we have today two types of guarantors, that help borrowers receive a mortgage. In the following passages I’ll try to describe the two types and how they can help us.

BOI regulations limits the ratio between monthly mortgage payments to the borrower’s available income  (after taxes). This ration may not exceed 50%, and in most cases may not even exceed 40%. This regulation was intended to ensure borrowers financial stability and banks’ safety.

As much as this makes financial sense. for some families this means that they can’t buy the house they want. This is especially true for borrowers receiving support from family members because this support isn’t perceived as income.

For exactly this situations BOI came up with Arev Tomech – a family member who’s income will be counted towards the borrowers income, when determining the mortgage limits.
The Arev Tomech has to follow these rules:

1. He/She are an immediate family member: spouse, parent, sibling or offspring.
2. The guarantors income must be approved as well according to bank regulations.
3. The guarantor pays himself at least 20% of the monthly payment from his bank account.
4. only 50% of available income  will be added.

This is a great solution for young couples trying to get onto the property ladder.

Who is this good for?

Young couples who receive family support, or young couples expecting a major income rise in the future. (For instance, if one of the partners is in a parenting leave.

Q&A

1. can anyone be guarantor? no, just someone from the above list.
2. If the guarantor already has a mortgage, does this have any effect? yes, it affects how their available income is calculated.
3. Can a family member from abroad be a guarantor? only if they have a bank account in Israel, and only if the bank approves this explicitly.
4. Can I pay back the guarantor? yes
5. What happens if one defaults? The guarantor is responsible for the whole debt.

BOI regulations limits the ratio between property value and the size of the mortgage loan, knows also as LTV – Loan To Value. Usually first time buyers will be able to borrow up to 75%.In some cases banks will limit this to an lower  ratio, such as: A property in the west bank, a property in the last floor, a very cheap property or properties with any illegal additions.

The limits on LTV and soaring purchase prices often make it very difficult to buy a home, even with high salaries or hefty parental help.

As a way to assist with this issue BOI   allows bank to use a family members property as collateral. The family member will be referred to a liening guarantor.

The regulations regarding this situation aren’t very clear, and tend to feel very arbitrary.

Here are some of the guidelines:

1. Bank will only allow using an immediate family member’s: spouse, parent, sibling or offspring.
2. The limit in LTV for the parents apartment will be 50%. This will include an existing mortgage and the new one.
3. Banks will not approve a loan grater than 100% and will always prefer you “put skin in the game“.
4. Assuming the parents already have a mortgage, banks will usually only agree to give a second mortgage if they are the bank with the first mortgage.
5. The loan on behalf of the existing property will incur higher rates than a regular mortgage.

Who is this good for?

Young couples who have a high income but low capital. Borroers that have mortgage free family members.

Q&A

1. Can anyone be guarantor? no, just someone from the above list.
2. If the guarantor already has a mortgage, does this have any effect? yes, it affects their LTV limit.
3. Can a family member from abroad be a guarantor? only if they have a property in Israel.
4. What happens if one defaults? The guarantor is in risk of loosing their house.
5. Which bank will do this? In theory all of them, practically only Mizrahi-Tfahot is consistent in approving this.