Among the questions I get asked most frequently is whether it’s better for people who can afford the down payment, to buy or rent a home in Israel. While each person’s financial and life circumstances need to be taken into account, here are five reasons why owning your home in Israel can make excellent financial sense.
1. You will eventually lower your cost of living. If you secure a mortgage that costs about the same as rent, your out-of-pocket expenses will not change. Eventually, you will pay off the mortgage, thus eliminating what was among your largest monthly expenses. Once your monthly outlay is less, you can look forward to working fewer hours and having more time to do the things you most enjoy. Alternately, you can begin to invest that extra money for your future. The ability to live on less gives you freedom you won’t ever achieve when renting, because your rental payments will never end.
2. You can reduce future uncertainty. Some people are reluctant to commit to a mortgage because they don’t know what their circumstances will be like down the road. Baring unusual circumstances, you will still need a roof over your head 10, 20 even 30 years from now. Signing a rental contract for a year or two at a time may seem less scary than committing to a mortgage, but in fact, a mortgage can help you reduce a good deal of future uncertainty. In contrast to being at the mercy of a fluctuating rental market, you’ll know in advance what your monthly payments will be. Even if your mortgage terms are only partially fixed, you can still anticipate your monthly payments when interest rates or inflation rise. When you rent, yearly increases come at the whim of your landlord.
3. Interest rates are historically low. This means that it will cost you less to borrow money now than it has in the past, and that it might in the future. Since a mortgage is probably the largest sum of money you will ever borrow, it makes sense to do so when interest rates are lowest.
4. You’re not throwing away money on interest. You’re buying equity. Some people avoid taking a mortgage because they feel they would be throwing away money on interest each month. But is that really true?
Suppose you take an 800,000 NIS 20-year mortgage with a fixed rate of 4.6%. Your monthly mortgage payment will be 5000 NIS, of which 1,770 NIS is interest. Is that interest money thrown down the drain? Not at all. The non-interest portion of your mortgage payment is going toward building equity in your home. Contrast that with a rental payment of 5000 NIS per month. If you paid the same amount in rent, at the end of a year, or two, or 20, you’d have zero equity to show for all those rental payments. That’s truly throwing away money.
5. Housing prices are not likely to decrease significantly, in the long term. I am not suggesting timing the market, no one knows if housing prices will decrease in the short term. Housing in Israel is expensive and government promises to bring housing prices down are unreliable. There is currently a recommendation to cut VAT for first-time home buyers, but even if this is passed, I don’t believe that alone will lower market prices.
What contributes to high prices for housing? In addition to the government not releasing more land to build, Israel is a small country. With an annual population growth of 1.8% and new immigrants coming on Aliyah, the demand for housing outstrips available supply. Even if the government were to release more land to build on, there is a finite amount of total land available in Israel. This means that chances are good that your home will increase in value, over the many years, you live in it. Even if large stock indexes are, overall, a better investment, that route presumes you actually have money left to invest in stocks after you paid your rent, or that you take your down payment and invest it fully in the stock market, which most people do not do. If you invest in real estate, you are also securing a home for yourself and your family.
Finally, what makes financial sense should make psychological sense as well. Buying one’s home, as opposed to renting, brings a sense of security. Several studies, including one from Harvard University, conclude that buying a home is good for us psychologically and socially and is associated with a higher degree of overall life satisfaction.
There are many other factors to consider when deciding to buy versus rent. In order to avoid the anguishing effects of a real estate bubble like the one the US experienced in 2008, Israeli mortgage lenders generally require 30%-40% down for first time buyers. This can make qualifying for a mortgage tricky. Additionally, if you buy, a certain amount of money is necessary for upkeep. On the other hand, renters have to spend extra money on legal fees and moving every few years since most rentals are not long term agreements.
If I can answer any questions about your family’s decision to rent versus buy, please contact me at email@example.com