When to Take Out a Mortgage — Good and Bad Reasons to Delay
So far we've covered the considerations in setting the down payment and the balances you need when setting the monthly payment. Now it's time to talk about timing — the right moment to take out a mortgage. After all, as everyone knows, in life timing is everything.
We need to decide when to actually take out the mortgage — whether to start the process as early as tomorrow, or to put it off as long as possible. This decision may not apply to you — for example, if all the money has to be transferred in two weeks (in which case drop everything and head straight to a mortgage bank!), or if the terms of the sale agreement don't let you make early payments at all.
But if the next payment — one that doesn't come from your down payment — is scheduled far in the future and you can control its timing, you'll need to decide when to start the process.
In our view, there are good reasons and bad reasons to delay the mortgage process. In this article we'll go through them and try to root out patterns of behavior we consider mistaken.
- Completing the mortgage process takes between 45 and 60 days. It can run longer if the property or the borrowers are complicated.
- The timeline breaks down into a planning stage (usually up to a week), a negotiation stage (three weeks to a month), and a collateral stage.
- Unless you have a reason to make early payments, there's no point starting the process ahead of time, since the principle approvals you receive are only valid for 24 days.
Good reasons to delay taking out a mortgage
First reason: to move up to the next LTV bracket
A good reason to delay is if we're just above the bottom edge of our LTV bracket and our savings rate will let us drop to a lower one in the coming months. Mortgage mixtures with high financing carry higher interest rates (though not dramatically so) than mixtures with low financing.
As part of the Basel IV rules on capital requirements for handling credit risk, the supervision of the banking system requires banks to set aside funds whenever they grant a residential mortgage.
For every NIS the banks lend, they have to set aside a smaller amount and leave it untouched. How much they set aside depends on the LTV. If 60-75% financing is needed (a high-LTV mortgage), the bank has to set aside more than for a mortgage of 45% LTV or below (a low-LTV mortgage). In other words, one million NIS of the bank's money can be tied up in a single high-LTV loan, or in more low-LTV loans.
The bank would rather spread the set-aside money across several loans, because that lowers its own risk.
The property is worth one million NIS; we've saved 390,000 NIS (between 60-75% financing). If we can save the remaining 10,000 NIS to drop to 60% financing in the next two months, go for it — keeping at it can save tens of thousands of NIS in interest.
Second reason: household income is about to jump
If our financial situation is about to improve dramatically, it's worth waiting to strengthen our standing as borrowers with the bank. For example: finishing studies and starting work, completing a residency with a raise, or moving to a higher-paying job.
Interest-rate pricing differs between a household with two working partners and one with a single borrower. A higher monthly income lowers your payment-to-income ratio (PTI) and therefore improves the rates in your portfolio.
- The payment-to-income ratio (LTI - Loan to income ratio) is the mortgage payment divided by disposable income.
- Mortgages are generally not granted when the payment-to-income ratio exceeds 40%.
- The lower the payment-to-income ratio, the "stronger" the borrower is considered and the lower the risk the loan poses to the bank.
Third reason: about to complete three years since a material negative credit event
A bounced check, bankruptcy proceedings, or cancelled standing orders — these are material negative items that will affect your mortgage. Material negative information stays in the credit data registry for three years from the end of the event. So if something like this happened, try to wait three years, and then no bank needs to know about it.
Note: One-off negative events generally don't affect mortgage approval. That said, if a negative event happened at Bank A, it may land on a separate internal "blacklist" — with no time limit.
Bad reasons to delay taking out a mortgage
The goal of delaying is usually to improve your starting position — to save money or cut interest costs. In our view, dragging out the process means taking a dangerous, uncontrolled gamble.
Wrong reason number one: the money is "working" in the capital market and earning more than the mortgage interest rate
If your investment channels earn a higher return than the mortgage interest rate, that probably means they're riskier. To beat the mortgage interest rate, you have to take on more risk — for example, by investing in the capital market.
The problem: in our view, you shouldn't invest money you'll need soon. Risky assets can lose value at any moment. If the money is earning a 7% annual return but could drop 10% at any time, it's simply not worth it. Don't gamble with money you'll need soon.
Wrong reason number two: the Construction Input Price Index (CIPI) is rising less than the mortgage interest rate
The argument: if the Construction Input Price Index (CIPI) rises 1% a year and the mortgage interest rate is 3%, why start paying?
The problem: this is a gamble on the Construction Input Price Index (CIPI), which can rise and burn you at any moment. If the index hits 6% next year, your debt to the contractor grows by tens of thousands of NIS for nothing. Can anyone promise the index won't shoot up in the coming years?
Wrong reason number three: why start the headache now?
The argument: things will be better soon, and in the meantime we'll spare ourselves the hassle.
The answer: the best time to take a mortgage is now. Every month we delay means one month later we finish the mortgage. Dragging it out eases the burden on us now while gambling on our future selves 25 years from now.
Are we sure we'll be able to make the payments in 25 years? Will we be in good health with steady work?
Summary
A mortgage is like a medical procedure you're dreading. If the time has come to take it out, there's no point putting it off. The earlier we start, the sooner we put it behind us.
When you're ready to plan your mortgage for real, head to our mortgage calculator and build a mortgage mixture that fits you.
Good luck!