What You Can Do to Get Better Interest Rates (Even Before Negotiating with the Bank)

The way to sharpen the interest rates in your mortgage mixture is by playing the banks off against each other in a negotiation. You can also improve rates by tweaking the mixture itself — for example, adding a teaser-rate loan. These are moves you make at the end of the mortgage planning process, when you're negotiating with the banks. But there are also steps you can take even before you approach the banks at all, to land a better, cheaper mortgage.

The financing terms you get depend on the legal status of your property, the deal terms (the LTV (loan-to-value) bracket and the structure of the mortgage mixture), and your profile as a borrower. This article is about the steps you can take to strengthen that profile. The motivation is simple: the higher-quality and stronger a borrower you are, the more banks will want you as a customer and the better the rates they'll offer.

There's quite a bit you can do to make your mortgage application look better to the banks. Because the steps we describe here take time, you'll need to start working on your mortgage long before you're even thinking about the mortgage mixture or setting foot in a bank branch.

The first key to better interest rates — improving your payment-to-income ratio

Bank of Israel Directive 329 sets out the restrictions on banks when they grant the public a residential mortgage. Sections five and six define the permitted payment-to-income ratio (PTI).

For example, if your household income is 20,000 NIS (net) and you want to take out a mortgage with a monthly payment of 5,000 NIS, then the payment-to-income ratio is five thousand NIS divided by twenty thousand NIS, which is 25%.

Even above 35%, you could get less favorable interest rates at some banks — and some banks will drop out entirely and refuse to participate in the deal. The payment-to-income ratio doesn't just decide whether you get a mortgage or not — the Bank of Israel's monthly reports show that lowering it directly improves the rates you'll be offered.

So our goal is to push the payment-to-income ratio as low as possible. How? By cutting expenses and raising income.

Step one: Earned income and expenses

First, let's start with raising income.

As a self-employed borrower (meaning you're classified as a VAT-exempt or VAT-registered sole proprietor for income tax purposes), you and your accountant are on a never-ending hunt for expense invoices. You try to rack up expenses, shrink your profit (before tax), and pay less income tax — so you keep more money in your pocket. Surprise: when it comes to the mortgage, that approach works against you.

To recognize your income as self-employed, the bank uses the annual tax assessments you file. But for the current tax year — or if you haven't yet filed an assessment for the previous one — it relies on your accountant's declaration of your income. Your accountant fills in a dedicated bank form declaring your revenue, expenses, and taxes paid, and from that the bank works out your "net" income.

The drive to lower your income (to pay less tax) runs head-on into the need to show more disposable income. Fortunately, self-employed people can control the timing of their tax payments during the year. So if you have large expenses, report them next month. And if you have money that's certain to come in soon, you can book it now — even before it lands in your account. Next month, your accountant can square it all away, because tax is paid monthly but reconciled annually. From experience, we can tell you these moves have been, more than once, the difference between getting the mortgage and not.

If you're a salaried employee on an hourly wage, you can boost your pay slip by working overtime. Banks calculate salary as the average of the last three months, so raising your income before you submit the principle approval will help your payment-to-income ratio.

And if you're a salaried employee on a global salary whose pay includes irregular components like bonuses, plan your mortgage application for the months the bonus is paid — or show the bank Form 106 (annual wage statement) from recent years to prove these bonuses come on a regular basis.

Step two: Non-earned income

We're not naive — we know there are cases where you might think twice about doing the above. But if this extra income is what stands between you and the mortgage, it's worth sorting out quickly. Keep in mind that the official confirmation is critical: if the property isn't registered in your name at the Land Registry (Tabu), the rental income probably won't be recognized. And without a confirmation from the National Insurance Institute (NII) of a permanent pension, that income may not be recognized either.

Step three: Reducing expenses

We didn't mention this earlier, but disposable income is the total money coming in minus your current expenses. Current expenses are all the hard commitments and loans that run beyond 18 months. So if you're planning to buy a new car on a loan, or thinking about a non-bank loan to scrape together the minimum down payment, hold off until after you've taken out the mortgage.

That way, your payment-to-income ratio won't take a hit.

The second key to better interest rates — looking better to the banks

Money isn't everything, and there are "soft" moves that can work wonders on your application once it's submitted for approval. Start with the credit data registry. Every bank pulls your credit history from the national credit data registry, so pull it yourself too — you can use Captain Credit, for example. The app helps you see where you stand and, far more importantly, what you can do to improve your credit score.

Wait before making professional changes

"The only one who likes changes is a wet baby"

- Mark Twain

If the entrepreneurial bug has bitten and you're planning to leave your salaried job to start a new business, wait until after the mortgage. Banks don't like instability. The same goes if your business is growing and you want to move from a VAT-exempt or VAT-registered sole proprietor to a limited liability company (Ltd.) — wait on that too! Some banks require a minimum tenure before they'll even consider applications from business owners.

And finally — this is the most important preparation you need to make

From our experience with the mortgage process (you can read more about mortgage advisory with Finwiz), the most important preparation to make six months out is actually mental, not procedural. The instinct is to treat the mortgage as one enormous hurdle and pour every effort into clearing it ("How do we get the cheapest mortgage out there?", "How do we lower our LTV?") — and the result is that more financial resources get tied up and sacrificed for the mortgage than really makes sense. Our fix is dead simple: sit down, six months ahead, and figure out what financial goal you want to reach after you take out the mortgage! Think about the next investment property you'll buy, the new business you'll start, or the community project you want to get off the ground.

Work out how much money that goal will take — it'll go a long way toward focusing your priorities: how much to take from your parents (if at all), whether it makes sense to draw on your study fund (keren hishtalmut) specifically for the mortgage, and which mortgage will actually help you reach those goals.

Good luck!