Mortgage Return Ratio – The Number That Determines Everything

Many people think that income level is the only factor in getting a mortgage, but banks examine a much more important metric: the return ratio. Understanding this concept is critical on the path to homeownership, and it's an integral part of professional mortgage consulting.

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What is the Return Ratio and Why is it Important?

When you apply for a mortgage, the bank doesn't just look at how much money you earn per month, but mainly at how much free money you have left after deducting existing obligations. The return ratio is essentially the percentage of your total available income that is allocated for the monthly mortgage payment.

For example, if a couple's combined income is 20,000 NIS net, and the expected mortgage payment is 5,000 NIS, the return ratio is 25%. This is a critical figure because banks are subject to Bank of Israel regulations that limit the level of risk they are allowed to take.

The Bank of Israel Rule

According to regulations, banks cannot approve a mortgage where the monthly payment exceeds 50% of available income. In practice, bank policies are more stringent, and most prefer not to exceed a return ratio of 35%-40% to leave a safety margin for the household.

How is the Determining Income Calculated?

Employees and Self-Employed

For employees, the bank calculates an average of the last three pay stubs (net). For self-employed individuals, the examination is more complex and is based on annual tax assessments and accountant confirmations. Mortgage consulting for home upgraders or self-employed individuals must take income volatility into account to present a stable picture to the bank.

Loans and Obligations

From net income, the bank deducts fixed obligations: existing loans (with more than 18 months remaining), alimony, and other long-term commitments. Note: credit lines or credit card payments are generally not deducted, unless it's a large and fixed "installment deal."

Additional Income

You can also add to the qualifying income rental income (if there is a valid contract and proof of deposits), certain allowances from National Insurance (such as permanent disability pension), and sometimes annual bonuses if they appear consistently in pay slips or Form 106.

How to improve the repayment ratio?

In many cases, couples are rejected by the bank not because they don't have equity, but because of a borderline repayment ratio. As part of mortgage consulting, we examine several strategies to solve the problem:

Loan consolidation: Closing short-term loans with high monthly repayments and redistributing them as part of the mortgage (or as a long-term loan) to reduce the total monthly repayment.
Adding guarantors: In certain cases, adding parents as additional borrowers (paying guarantors) can increase the calculated joint income and improve the ratio.
Extending the mortgage period: Spreading the mortgage over a longer period (for example 30 years instead of 20) reduces the monthly repayment, although it increases the total interest over the life of the loan.

Important to remember: A proper repayment ratio is not just a bank requirement, but a protection mechanism for you. A family that commits to repayments that are too high risks financial difficulty in the future, especially when interest rates in the economy change or when the family expands.

The importance of future planning

When we provide mortgage consulting for a first home, we always recommend not to look only at the current situation. A young couple without children might be able to handle a 35% repayment ratio, but with children joining the family, expenses increase significantly (kindergartens, babysitters, food). Therefore, proper planning takes into account future changes in income and expenses.

Even in the process of mortgage refinancing, checking the repayment ratio is an excellent opportunity to rebalance the family budget and adjust the repayments to your current financial capability.

Want to know what your repayment ratio is?

Don't let complex calculations stop you on your way to a home. Our team at "Mortgage in Pajamas" is here to sort out the numbers and build the most accurate mix for you.

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