The truth is that the answer to the question of “How much does the apartment cost” only begins with the market value of the property – in other words, the sum of money that the contractor (in a case of a new apartment) or seller (in a case of a second-hand apartment) receives and is determined in the contract. There are actually three main parameters of additional costs to purchasing an apartment:
Additional Transaction-Related Costs:
Brokerage fees (1-2.5% of the property value), attorney fees, appraisal, registration and taxes. Other than the brokerage fees, there is generally not much room here for bargaining. Costs are determined based on set parameters, depending on the type of transaction and the client.
Costs of Entering the Apartment:
Renovations, moving expenses and, in many cases, interim housing costs. This expense is more flexible and subject to the client’s considerations as to the type of investment he is willing to make, the level of professionalism and reputation of the professionals he will be hiring, or the type of temporary housing he will choose as he awaits the conclusion of the work.
This section does not refer to the actual loan, which is part of the payment to the seller and is included in the general “property value.” Instead, “mortgage expenses” include:
The fees to be paid to the bank for the sum of money that it agrees to lend to us;
The linkage differentials that will come along with linked loan components;
In this particular expense, the client is at the mercy of the bank. The average consumer in Israel compares between two or three banks and then chooses the lowest offer.
But how do the banks decide which interest rate to offer? What and who determines the composition of the loan?
The mortgage banker is generally courteous, organized and patient. Unlike the bankers in the commercial section of the bank, the mortgage banker knows that his relationship with the client is, on the one hand, very temporary – only until the loan is provided, but on the other hand, it is a significant relationship. Taking out a mortgage loan is not something that the client does every day. In fact, for most clients this will be the largest transaction they will ever perform in their lives. Their relationship with the banking system, which he represents, is accordingly significant. At the same time, there is another thing that is constantly before the banker’s eyes: the bank’s profitability goals. Just like a representative of a cellphone company, insurance, or even kupat holim(HMO), a mortgage banker is apprised monthly based on a number of parameters, most importantly his keeping up with the sales targets demanded of him. Prior to his acceptance for the position he had undergone a complex evaluation that mainly tested his marketing skills. (After all, he had already demonstrated his financial know-how through his academic grades, and he will learn most of what he needs to know about mortgages and collaterals as he begins to work at the bank.)
Therefore, when sitting down for a meeting with us – his potential clients – the mortgage banker will expend significant effort to dispel our fears, explain the process and create a trusting relationship with us. In truth, if he is a good banker, at some point we may even find ourselves surprised to discover that the terms mentioned repeatedly in our conversation with the friendly banker, such as “linkage,” “LIBOR,” “variable interest,” “anchor,” and others – still sound confusing.
Now that the banker across the desk had managed to present himself as honest and well-meaning, he has succeeded in bringing us to the “monthly repayment plan that is best suited for our abilities,” and his explanation as to why this or that track is most appropriate will sound logical and almost comprehensible to us. He will provide us with a mortgage “composition” (not immediately; he will first take it up for approval, which we will generally receive within a day or two).
Since we may be trusting individuals but are by no means foolish, we will go through a perfectly identical process in at least one other bank, with but one difference: our anchor for comparing the various offers is now the first offer that we received from the first bank. The new bankers that we will meet from that point on will compare their interest rate offers to those of the first bank, altering the composition somewhat in order to be able to present some sort of advantage over their competitors and, no less importantly, to adapt the offered composition as much as possible to their own profitability goals.
Now that we are thoroughly confused but rightfully satisfied with the market survey that we had conducted, which had proven effective in lowering the interest rates offered to us, we will finalize the deal with the banker who had provided us with the lowest offer and with whom we had forged the strongest sense of trust.
What, then, is the problem? The truth is that there are a number of problems with this type of scenario. Let us discuss the main three:
As mentioned previously, even though the market survey that we conducted had proven itself effective in reducing the interest rates offered to us, it also comprised our relative basis for calculating its own advisability! Simply put, the bankers we met set the interest rates according to their competitors’ offers; not necessarily according to the lowest interest rate that the bank can actually offer. In other words, at some level, the banks will perform a sort-of “alignment” to their competitors and not really present all the cards to us (on their part, rightfully so!). It is very important to understand: unlike cellphone companies, for example, when it comes to mortgage-type loans, the variety in available tracks, compositions, and even repayment schedules provides the professional and creative banker with many options to customize the mortgage plan to his client in a way that will allow him to significantly reduce the interest rates (relative to the market).
What else is there, besides the interest rate? When conducting his personal market research, the buyer tends to focus on the interest rate, and that is indeed a very important factor. However, it is not the only factor – and not even always the most important one. For example, the banker will probably offer you tracks with variable interest. This will allow him to give you relatively low interest rates, since the bank may be taking on a large undertaking in the short run, but on the other hand, it receives the borrower’s liability for a far longer period of time (see detailed explanation in the essay titled “Mortgage Tracks”). That is all good and well, but aside from the low interest rates (which, don’t forget, will change over time as well), these tracks are also linked to the price index, which means that the money is expected to lose some of its value over the life of the loan, and you, the borrower, will be the one to absorb this difference – not the bank. And since statistically, the index in Israel has only been rising over the last twenty years at approximately 3% per year, we can assume a similar rise in this type of mortgage as well and add those three percent to the low interest rate you received – which would make the offer no longer as attractive as it may have seemed at first… in the same way, the foreign-currency track is also similarly linked, not to the index but to the exchange rate (see further explanation in the essay titled “Mortgage Tracks”). This linkage is a critical factor, since it is expected to raise the borrower’s monthly repayments by increments that may be small but steady – nearly every month. Even more importantly, these linkage differentials are added to the original loan (the principal), so that at some point, when the borrower inspects his debt’s status, he may discover that despite paying his dues punctually every month for years, he still owes the same amount of money he had originally borrowed, and sometimes even more!
Choosing the composition of the loan: as previously stated, the banker has his own sales and profitability goals in mind. When he prepares your plan, these are the main objectives guiding him (and those overseeing him who are to approve the plan). He views himself as responsible for reaching a balance between your own expected cash flow (your income, expenses, realizable assets, anticipated inheritances, bonuses, major expenses, etc.) for a mix that will maximize the bank’s profit from the loan. Obviously, for you, a “balance” like this entails unnecessary fees amounting to thousands or even tens of thousands of shekels throughout the life of the loan. Personally, you are not interested in bringing the maximization of the bank’s profits into the equation – you just want to adjust the mortgage plan to your expected cash flow during the years of the loan’s life.
Enter the mortgage adviser. We place ourselves in our client’s shoes, putting his personal interests as the single consideration in creating the loan composition, and manage all negotiations with the bank on his behalf, with one difference: we are coming from within the system. We know its internal considerations, we speak the “banking lingo” and can steer the loan composition and interest rates that are truly best for our client’s needs.
In addition, when we approach the bank, we are coming with a large client base, so the banks know that while they may receive less profit from loans performed through us, in the long run they accrue more clients.
Our services also fall under the category of “additional expenses,” and yet in this case, the return value in the one most expensive category – the “mortgage cost” – is extremely high and the investment pays itself back many times over.