Restructuring your Mortgage/Debt - by David Baruch, RBS Branch Bank Manager

What is a mortgage?
A mortgage is a very long term loan, against a lien on the property you are living in. A recently passed law requires banks, if they evict you, to either provide housing for 18 months or the equivalent rent. Generally they do not want to evict clients, there is no advantage for them and it makes them look bad. They will try to work it out with you to keep you in the house.

If you see a potential problem, speak to the bank before it becomes worse and it will be easier to work something out. There are three potential situations you may find yourself in:
1) No problem yet but you anticipate a problem
2) You have had a recent problem, and are 2 or 3 months into it
3) You have a serious problem and the bank may have to foreclose

Sidebar: You are only penalized for writing bad checks after 10 bad checks in a 12 month period. If you do your account becomes "mugbal" or "limited" and you can't write checks in that account for a 12 month period. If the problem reoccurs within a three year period in that account or any other account then the individual becomes "mugbal chamur" "severely limited" and cannot write checks in any account for a two year period. This can affect your banking because it will show as a black mark on your credit and can make getting mortgage approval harder. (this does not apply to Hora'at Keva, only written checks).

So if you are currently in a good position but are anticipating a hard time, go to the bank now to refinance. Bear in mind, it may ironically also be a bad time to refinance, because the bank will see that you are in a troubled financial situation and restructuring a mortgage is basically getting approval from scratch for a mortgage. So if the bank doesn't think you are a good "bet" you might be rejected.

In some banks the mortgage branch of the bank, even though it is part of the same overall bank, think as if they are a separate entity completely. In the big picture it might be better for your overall finances to refinance but if the bank doesn't trust that you can make the payments they may say no, even if the regular branch manager thinks it will be good for the client. It will be easier to convince them the earlier you go in to discuss it.

So, can you get a loan at 1.5%? Yes, in certain situations. Long term loans can be cheaper and can ease your monthly payments, if you need it. A short term loan may be prime + 6%, for example, but a mortgage can be prime + 3% and spread over a longer period thereby bringing down monthly payments. So it can be worthwhile to take out that kind of loan.

In the past all loans were linked to the Consumer Price Index (Madad). Loans are amortized - this means that the monthly payments stay the same, assuming nothing else changes (if the payment is linked to the prime rate or CPI then they will change) even though the proportion of each payment that is interest as opposed to principle will change over time. In the beginning you are mostly paying off the interest, and at the end you will mostly be paying off the principle, but the total monthly payments have been divided evenly over the life of the loan.

Types of loans:
1) Linked to CPI or foreign currency
2) Linked to prime
3) Not linked to anything
4) Combination of the options
5) Loan in foreign currency

There can be early payment penalties as well, for CPI linked loans, so you have to decide if it is worth it to refinance given the amount of the penalty you will have to pay.
Prime is 1.5% above the national interest rates, so if the Bank of Israel declares an interest rate of 0.5% then prime is 2%. New rates are generally announced during the last week of each month.

Prime loans only affect the interest, so your principle is never affected. Loans linked to the CPI can raise your principle as well. But there are advantages to both and many mortgages are made up of both types of loans.

You can also get a mortgage linked to the Dollar or Euro. The loans are in shkalim, they are amortized loans, and are linked to the changes in the exchange rate. So if you have a dollar-based income this can be a good choice for you because you will always be paying out based on the same rate you are taking in.

For those who actually get paid in dollars, as opposed to shekels based on the dollar rate, the banks started giving dollar loans. The main difference for this loan is that you are paying equal principle payments plus interest based on the remaining amount of principle, so both your principle part of the payment and the interest part will go down over time (as opposed to the balance discussed above where the payment stays the same over time). Every 3 or 6 months the interest rate is recalculated based on the LIBOR rate. You can generally do a pre-payment with no penalty for a foreign currency loan.

Today, unless you have an actual dollar income it's not recommended to take this loan because currently the LIBOR rate is very low (which means it will go up) and the dollar over time will probably go up, not down but no guarantees this will happen.

Let's say you took a 25 year loan. You've paid back 7 years and now want to renegotiate. Even though you've been paying off interest, as opposed to principle, it may still be worth it because if you have a loan at a higher rate linked to the CPI you may be able to get a lower rate, not linked, and overall that might be better for you. Of course you also have to take into account the pre-payment penalty, so every case is unique and needs to be discussed with your bank.

When you spread out a loan your monthly payments go down but you are paying more interest over the life of the loan. So it's not an easy financial decision as in the long run it may but may be worth it for you anyway in order to enable you to buy a house you wouldn't be able to otherwise afford.

Can you move a mortgage from one bank to another? Generally, yes. "Zakaut" loans (based on where you live, or a young couple buying a first house, etc - a good thing is that you can do pre-payment without a penalty) can't be transferred. If there is a grant as part of that loan you need to make sure you don't lose that and that can be tricky so it isn't always worth paying them back early. Zakaut loans aside, in most cases one bank won't give you part of a loan when the other part is at another bank.

Bridging loans can help when you are selling your house and buying a new one but it can also work against you, so make sure to discuss your specific situation with your bank.

There are fixed rate loans, not linked to anything, but the interest rates are very high. It's a very good idea for someone, perhaps learning in kollel, who knows they will have a fixed income for a long time.

How does the bank decide if you are a good credit risk or not? About 5 years ago banks started using stored information from central credit archives -under government license. They look at bank transactions over a 3 month period - it's not perfect but shows what is going on in a person's life. They look at if there are returned checks, if there are issues with the Bank of Israel, or any other banks. They look at your income, how stable it is (the "tlush" has written on it how long you've been at the place). If you have US income they look at 1040s, or equivalent if you are an S-corp.

Do not overextend yourself - you should not take on more than 30% of your monthly income as mortgage/loans together. If you take on financial commitments that are too high, you have no quality of life, it's not worth it.