Divided Apartments Pose Mortgage Challenges for Israeli Lenders

Apartments divided into multiple units, often marketed as high-yield investments, face significant hurdles when seeking mortgages in Israel. While owners may see potential for double rental income, banks and appraisers typically assess the property as a single unit, reducing its perceived value and the loan amount available. This valuation is based on legal rights and includes a deduction for the cost of restoring the apartment to its original state.

Banks generally approve mortgages for apartments split into up to two units, but financing may be capped below the standard maximum, and interest rates could be slightly higher. For divisions into three or more units, some banks refuse to provide mortgages, directing borrowers to non-bank lenders or requiring additional collateral. Even with municipal approval for divisions, the bank's valuation remains lower than the market price based on dual occupancy.

This discrepancy can create a substantial gap in the down payment required from the buyer. For example, an apartment valued at 2.2 million shekels based on two units might be appraised at 1.85 million shekels for a single unit, minus restoration costs. If a buyer seeks 75% financing, this difference could amount to a 260,000 shekel shortfall to be covered by personal equity.

Insurance companies may also limit coverage for illegally divided apartments, and neighbors can report violations, leading to potential fines or orders from the municipality. To avoid surprises, potential buyers are advised to obtain a preliminary appraisal before signing a contract. This allows them to understand the bank's financing limitations and potentially withdraw from the deal if the gap between expected and actual loan amounts is too large.

Alternative solutions include restoring the apartment to its original state, providing other collateral, or securing higher-interest loans from non-bank institutions. For those purchasing a primary residence, the division is less of a factor, though the bank still bases the mortgage on a single-unit valuation. Rental income calculations are also affected, with banks recognizing only a portion of the total rent from multiple units.