Buying “on paper" (a home that hasn’t been built yet), is often cheaper than buying a home already built and often provides you more flexibility in customizing your home. But to buy on paper, you first must understand linkage to the Construction Input Index (הצמדה למדד תשומות הבנייה).
What is linkage? Linkage means that part of your on paper home price isn’t fully set. Instead, it’s tied to a national index that tracks the cost of construction materials and labor. As the index rises during the time that your home is being built, the unpaid portion of your home price increases accordingly. Over the past 10 years, this linkage index has gone up by an average of 2.34% per year.
How it works: The current law is that developers can link approximately up to 40% of the home price to this index (for example, a 1 million purchase with 200k down payment, 400k out of the 800k remaining *won't* be linked to the index and 400k *will* be linked to the index). Also, since linkage only applies to the amount you haven’t paid yet, timing matters, in that the more you pay upfront and the sooner you pay it, the less exposure you have to linkage (once a payment is made, it’s locked in and no longer subject to linkage).
Pro tip: Linkage amounts and percentages are very negotiable. Some developers are open to reducing or even removing linkage if you agree to pay more money upfront or meet certain conditions.
Can linkage payments be added to your mortgage? Yes, but it depends on your loan-to-value (LTV) ratio.
For example, if you’re an Israeli citizen buying your only home for ₪3,000,000 you can get up to 75% financing or ₪2,250,000. If the index rises and adds ₪60,000 in linkage costs, your new total home price becomes ₪3,060,000. Whether that extra ₪60,000 can be included in your mortgage depends on how much you’ve already borrowed. If you’re maxed out at ₪2,250,000, the extra must be paid out of pocket. But if you’ve only borrowed ₪2,200,000 so far, and you’re still under the 75% cap, your bank may approve adding it to the mortgage.
Note that this is exactly where a good mortgage broker adds value, as the broker will review the contract before you sign to:
1. Make sure you understand your linkage obligations.
2. Break down how linkage impacts your financing.
3. Help you figure out if, and how much, can be financed.
Additionally, most developers will offer two different payment tracks for new projects; one that's tied to the index and one that isn’t. A good mortgage broker will help you understand and compare both options, so that you can choose the best fit that works for you.