Seven Mistakes People Make with their Mortgage in Israel
A true story.
A family that was struggling with their monthly bills. The family was advised to check out their mortgage terms. After an exhaustive analysis what they discovered was horrendous! Apparently twenty years ago they took a mortgage of 115,000 shekels from the bank. After paying for twenty years they still owed the bank 117,844 shekels! After 20 years of paying, they owed the bank more than they originally took! Your mortgage is the biggest deal you will ever do- It should be treated accordingly. Here are the seven mistakes you do not want to make with your mortgage. These principles can save you tens of thousands of shekels. The figures we will use are based on a mortgage of 600,000 shekels.
1. Do not base your monthly payback on what the bank says. The number the bank gives you is based on the conditions today. If for example you are paying a certain sum today and your mortgage is linked to the inflation index- you might find yourself paying in 25 years more than double what you are paying today.
2. Do not base your total interest of the loan on what the bank tells you. When you take a mortgage of 600,000 shekel, you will in the end pay 950,000 shekels including the interest. If your mortgage is linked to the inflation index you might pay a total of 1,370,000 shekels! This is a gap of 420,000 shekels. Now that is a lot of money- but the bank won’t tell you anything about that.
3. Watch out for a program which includes variables. There are two classic examples of that. Mortgage that is linked to the inflation index. For example- If you take the 600,000 shekels mortgage and attach half of it to the inflation index instead of all of it you can save a lot of money. A mortgage with an exit date could sound good. This usually means that every 5 years you can pay off the balance of the mortgage. But on the other hand this usually means also that the interest changes as well and this can again cost you tens of thousands of shekels and more.
4. Take your mortgage for the minimum of period. Banks are happy to extend the repayment period as much as possible. People are happy to do this because it decreases the monthly payment. But the reason the banks are happy to do that is because then the total interest is higher. Increasing the time of paying back from 20 to 25 years will cost you, in our example, more than 200,000 shekels. You should aim to pay back the mortgage in the shortest time possible but with the most reasonable monthly payment in accordance with your financial strategy.
5. Don’t get stuck on number five Meaning, the bank offers the period of payments in multiples of five. There is nothing holy about that number. Choose the number which is good for you. In our example- taking down the mortgage from 25 years to 24 years will save you more than 40,000 shekels.
6. Fight for every 0.1% of the interest! The bank will make you feel that you are being petty. But every 0.1% in our example is more than 10,000 shekels! If a car salesman would ask you for another 10,000 shekels for your car you would not agree. The bank should not be different.
7. Chose the right option for yourself! The bank has more than 20 different tracks. The differences between them can be, as you saw, hundreds of thousands of shekels. Check them carefully and choose the one that is most suitable to you. We personally recommend “Barak- Counseling and Investments”- Besides the fact that they know the field well, they have excellent interpersonal skills and are fun to work with. From our experience in Segal Insurance we learnt that mistakes can be made- mortgages can be revised-you don’t have to live with a bad deal to the end!
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