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There are numerous types of flat screen technologies, each of them with their own advantages and disadvantages. What looks good in the store may not look the same way in your home or office. Similarly, with regards to mortgages, what may be appropriate for one borrower may be completely inappropriate for another. For example, a foreign currency denominated mortgage may work well for a borrower earning his or her wages in that currency, but will present a financial risk to someone who is not. Some flat screens are better suited for outdoor use while others are more appropriate in the domain of ones living room. With mortgages, some scenarios call for securing a fixed rate, will other scenarios are best served with a variable rate. Pinpointing the exact needs of the borrower, and pairing those needs with the appropriate loan product is critical.

While we were eager to finish with our flat screen project, we knew that picking hastily and “just getting it done” could end up in our making the wrong decision, the result being poor visibility through our tinted windows, not being able to make out the information if one is either too close or too far from the screen, or even worse, that the screens would be used incorrectly and burn out, voiding the warranty.

When considering which mortgage product to take in Israel, one similarly has dozens of variables to consider and each situation calls for a different solution: fixed or variable rate, foreign currency or shekel, linked to CPI or unlinked etc. Interest rates on these choices are fluctuating constantly and all may have massive discrepancies on rates between each bank. To further complicate matters, some banks provide 30-year loans while others only go up to 20 year. Some banks allow for a waiver on life insurance while others don’t.  Some banks have excellent rates on purchases but high rates on “cash-out”. Some banks require full documentation while others are less critical. Some banks “lock” the rate spread after the first installment, while other do not. The list goes on and on.

With all of these variables to consider, one may be tempted to turn to a bank’s mortgage adviser or manager for guidance since they are likely highly qualified individuals who offer their advice as a free service. However, just as I found in searching for guidance from the numerous flat screen salesmen I turned to, even the most well intentioned bank manager can only offer the mortgage products that his bank offers. As there are nearly a dozen lenders and close to 40 different mortgage products available, the advice offered from bank employees cannot cover the full gamut of options available.

Securing the right financing options can save hundreds of thousands of shekels over the life of the loan. Therefore, it is always advisable to seek professional guidance from an independent mortgage consultant who has only the client’s interests at heart and who is equipped with all of the financing options the market has to offer – especially, since with regard to mortgages, if you “burn out” there is no warranty.

It appears that these headlines have begun to take a toll on the market, with this past December, generally a busy time with with foreigners looking to buy and Israelis looking to move in time for the summer, being quite a quiet month. Where in December of 2010 Israel saw 8,466 sales , only a year later the holiday season produced 7,861 sales, a reduction of 7.7%. Despite the drop in volume, however, prices were 7.5% higher than in 2010.

To what do we owe this slowdown? A number of reasons that I can cite are the increase in interest rates, the banks’ continued restrictions on lending, the social protests throughout the country, and the political situation. While many see the political situation getting better, with the release of Gilad Shalit and increased diplomatic talks between Israel and the Palestinians, many also see the Iranian factor as a detriment. It’s really a mixed bag as far as the political situation goes, with those living here being less affected by it, as can be expected, while there is a correlation between foreigners’ purchasing here and the status of the political situation. In this broker’s estimation, it really makes no difference at all to those who live here and plan on staying – if you live here, you still need to buy, no matter what the region’s politics dictate.

Despite all of this, however, the banks are still not being as generous with lending as once before. Many who had been looking to purchase their homes have turned to the rental market, which has skyrocketed over the past year, despite the wide spread protests against housing prices this summer. Where the average three bedroom apartment in Central Tel Aviv could be rented for 6,500 – 7,000 NIS in 2010, the average price has now climbed to 7,500 – 8,500 NIS. Three bedroom apartments with a balcony, parking, and and elevator, in the city’s trendiest neighborhoods of Lev Hair and Neve Tzedek have been rented out over the last month for 12,000 NIS and 15,000 NIS respectively. One bedroom apartments will cost the renter even more, with average prices exceeding 5,000 NIS. Young couples, students, and roommates looking for apartments under 5,000 NIS report it taking over a month to find the ideal place, in most cases with the help of a real estate broker, a practice previously unheard of for apartments in this price range. Where renters used to be able to evaluate their options, decisions must often be made at the same moment as seeing the apartment, due to the extensive competition. To be sure, renting an apartment is not an easy task here in Tel Aviv.

For those in the market to purchase an apartment, the protests and economic situation have not produced the results many hoped for, with prices remaining relatively stable.  Buyers have remained quiet, preferring to wait to see what the market will yield, which accounts for the lack in sales volumes throughout the country over the summer. The lack of demand spurred some great values to be released to the market by motivated sellers trying to jump ship, with these under priced assets accounting for many of the sales that did occur over the past few months. A new 180 sm garden apartment in the up and coming neighborhood of Kerem haTeimanim sold for under 21,000 NIS per square meter, significantly below the 30,000 NIS per square meter average that the neighborhood typically commands. On the other end of the spectrum, a highly desirable small one bedroom apartment near the sea in the Old North neighborhood was sold for 40,000 NIS per square meter, just showing that for those who find their perfect home, the market conditions and political situation remain a decidely non factor.

With spring approaching, and a (G-d willing) improved social and political situation in the country, the real estate market may indeed continue to improve more over the next few months. As both buyers and sellers continue to gain confidence in the market, prices will stabilize, bringing back both the demand of years past, and the needed supply of apartments to make their dreams come true.

Mati Bortnick is a principal of the Maki Group, a real estate brokerage based in Tel Aviv, where he has been advising clients, brokering property, and organizing buying groups in Israel since 2008. Mati has been featured on HGTV’s House Hunters International, the Jewish Daily Forward , the Jew and the Carrot, The Israel Times & The Jerusalem Post. Visit the Maki Group at: http://www.telavivbroker.com/

A version of this article appeared in the Times of Israel: http://blogs.timesofisrael.com/tel-aviv-property-market-report-february-2012/

In the United States, the arguments are growing louder for a sweeping bailout of underwater homeowners.  With mortgage rates in the US the lowest they have ever been in history, the proposed plan will allow more homeowners a chance to refinance at today’s rock bottom interest rates regardless of how much they owe on their home.   With the new plan, any borrower who is current on their last six monthly payments can refinance to lower rates even if they already owe more than their home is worth.   Leaving politics aside, economists expect it to help 3.5 million homeowners and give a much-needed boost to the U.S. economy.  So the question begs, if interest rates in Israel have been going down, why hasn’t Israel’s economy benefited from a wave of refinancing as is the case in the U.S.?  The very short answer: onerous pre-payment penalties.

Mortgage refinancing helps stimulate the economy by increasing the consumer’s disposable income, perceived wealth, and confidence.  Most economies are driven by consumer spending-and a wave of refinancing can spark a sustained surge in consumer spending as borrowers’ monthly expenditures are reduced.  The cash that borrowers save can be used to buy much needed goods and services that they may not otherwise have been willing to spend on.

Pre-payment penalties are commitments by a borrower to make the interest and principal payments on their mortgage agreement for the entire loan term or face a penalty.  Under no circumstances may the loan be paid off without the penalty being levied on the borrower.  This includes refinancing, selling the home, or paying the loan off using savings or earnings.  Today in Israel, there are very few options for long term fixed interest rates without the possibility of a pre-payment penalty.  If a borrower wants to have the comfort of a fixed interest rate, the bank will demand in return the comfort of knowing that the borrower will pay the loan for the said 20,30, or even 40 years.  The banks do allow a payoff without penalty in one scenario: if interest rates have risen from the time the borrower took the loan (a scenario in which few borrowers would want to pay off the existing loan at a more attractive rate).  The penalties, which are intended to protect the bank, can easily reach 10%-20% of the loan amount with no maximum limit.

The total of outstanding medium and long-term fixed rate mortgages in Israel is roughly 100 billion shekels.  Assuming that these borrowers were able to save 2% on average by refinancing- this would save households over 2 billion shekels per year putting thousands of shekels per year back into many families’ pockets.  In the interest of stimulating domestic consumer spending the Bank of Israel would be well served by abolishing mortgage prepayment penalties entirely. With the social protests fresh in Israel’s mind, now is a prudent time to examine if it is socially just to allow banks to take advantage of falling interest rates by allowing them to borrow money more cheaply, while disallowing the homeowner to do the same.

A trust is the relationship whereby property is held by one party for the benefit of another. A trust usually arises when a property is transferred by one party to be held by another party for the benefit of a third party, although it is possible for an owner to create a trust of a property for himself.

A trust is created by a settlor or a grantor who transfers some or all of his property to a trustee who holds that trust property for the benefit of beneficiaries. The settlor relinquishes control and ownership of the property to the trust, which is controlled by the trustees.

The trustees have legal title to the trust property but owe a duty to the beneficiaries, and this duty is usually governed by a letter of wishes that is put in place at the time of the granting of the property to the trust. This dictates how the trustees deal with the asset and the duties they have toward the named beneficiaries.

It should be noted that the settlor himself can be a beneficiary of the trust. In the British legal system, trusts have held a time-honored place for the past 1,000 years, and even before then, Roman law had well-developed concepts of trust.

The intention of a trust is for the purpose of privacy. It can also be used to protect beneficiaries (for example, one’s children) against their own inability to handle money. Naturally, a trust is often created as part of legitimate tax planning and can be used, completely legally, to avoid taxes and regulation; for example, if the settlor is living in a jurisdiction that heavily taxes inheritance.

Acquiring the property through a trust – which is a completely separate legal entity and possibly resident in a different jurisdiction that does not tax inheritance – allows the legal avoidance (not evasion, which is illegal) of taxation.

It is worth noting that 5 percent of all property bought in Israel is purchased by foreign residents. This is translated into thousands of apartments every year and, over the past decades, constitutes billions of dollars of foreign investment in real estate, mainly residential.

In the past, most, if not all, of this property was registered directly in the names of the foreign buyers. There were enquiries by purchasers wishing to place title of these properties in the name of trusts or trustees, as is commonly done throughout the world, but this was not possible. Not until the reform of the trust legislation in Israel was it possible for such registration to take place. Although the Israeli legal system has recognized public trusts since the British legislation in the 1920s, private trusts were not regulated by legislation until the Trust Law was enacted in 1979.

However, the 1979 law did not meet the requirements that were usually needed in a trust. For example, the concept of trusts surviving generation after generation, which is usually the main point of a trust, was not recognized by Israeli law. The recent mini-income-tax reform that impacted directly the concept of trusts has changed all that. It is now possible to establish a foreign-resident trust created by foreigners and which can hold real estate in the hands of an underlying company wholly owned by the trust itself.

The trust is controlled by Israeli trustees, and the trust, trustees and the underlying Israeli holding company incur no Israeli tax consequences. Most importantly, the property is not owned or registered in the Land Registry in the name of a foreign resident but by a company that is a legal entity of its own, which in turn is controlled by the trustees.

Under the new reform the underlying company is regarded for tax purposes as a “see-through entity,” and the property is treated as if it is held by the trustee, although for registration purposes it is the company that is the owner of the property and appears as such on the title deed.

Another advantage to such a structure is that the rent emanating from the property – if it is under $1,400 per month – is tax free. This is part of the Israeli government’s incentive to owners to place their property on the rental market.

Note: The above describes the possibilities in general terms only, and detailed advice must be obtained prior to any action taken.

israelaw@netvision.net.il

Dr. Haim Katz is a senior partner in a law firm with offices in Tel Aviv and Jerusalem specializing in real estate, inheritance, international trusts and family law. Sam Katz is a jurist living in Jerusalem.

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