Where to save for your down payment in Israel

Last Updated on December 21, 2023

The information contained in this article is for educational purposes only and should never be viewed as specific investment, tax, or legal advice. Securities mentioned in this article should not be viewed as recommendations.

Saving for a house is a difficult challenge. On the one hand it feels like housing prices never stop going up while savings sitting in the bank are just wasting away. On the other hand you need to keep the funds safe and liquid because the last thing you want to do is miss out on the right opportunity. The truth is that there are no perfect solutions, but I will try to present many of the different approaches. Some of the concepts discussed in this article will be useful for any short term savings goal (1-5 years) – not only saving for a house.

I know what you’re thinking… unfortunately, I don’t have any secrets on where you can find the funds necessary to afford a down payment in the exploding housing market in Israel. There won’t be any secret lottery numbers buried in this article, even if you manage to make it through the whole thing. See our full guide “How to buy a home in Israel without help” for more tips on this.

Keep in mind that the minimum down-payment in Israel is 25% with many banks requiring closer to 40% down. Owning a house is not the right option for everyone.

Why taking risk is usually a bad idea

While this article will discuss many different investments, in most situations the best option for saving for a home is not investing at all. No one likes to watch their savings earn nothing in the bank while the stock market is rising or their friend across the street is earning 5% on XYZ platform. Yet, taking a step back and truly analyzing the situation – many will find that the potential reward is really not worth the risk. That is to say, it’s not just about how much you could lose but how meaningful the potential gains might be in such a short time-frame relative to the risk you are taking.

Say you are just starting your career and you are looking to put away money for your retirement. Those funds will have decades to compound and adding small percentages to your expected annual return could result in millions more at retirement. Playing around with the interest rate in any compound interest calculator using a 30-40 year timeframe will easily demonstrate this. When looking at significantly shorter time-frames, even if you were to achieve above-average returns on your investment, the results can be far less impressive. This is especially true when looking at the lower-risk investments that are often most popular for shorter-term investing.

Barring good luck, FOMO (fear of missing out) isn’t likely to be the basis of any successful investment strategy. The key is staying focused on what you are trying to achieve rather than what your savings could be making in some other investment. Creating a simple plan can help you stay on track.

Keeping the money safe in Shekels

As discussed above, many will come to the conclusion that the best place to be saving up for a home is in a liquid shekel account. This won’t account for general inflation or any increase in housing prices but it should ensure that you have the money accessible in the currency you need when you need it. Here are some of the ways to do that:

Segregating funds

Keeping the funds you are saving for a specific goal separate from the checking account you use to pay your daily expenses can be extremely helpful. Psychologically, it is much easier to avoid the temptation to dip-in to savings if you move that money to a separate account. Practically, this also makes it simpler to see the exact balance you have saved towards your goal.

Most Israeli banks will offer פק”ם) פיקדון קצר מועד) or (פיקדון ריבית יומי (פר”י which are essentially separate accounts with either daily, weekly or monthly liquidity. There are other types of accounts such as פיקדון צמוד למדד (Deposit linked to the inflation index) but those will generally have much longer lock-up periods and aren’t a good option for this purpose. Generally, a good first step is scheduling an appointment with a banker to get more information on what they are currently offering for this purpose or to use our complete guide.

Key details you should make sure you understand about each option include:

• How liquid are the funds – can they be withdrawn at anytime?
• If not, what penalties are there for early withdrawal (שבירת פיקדון)?
• What is minimum deposit required to open and maintain the account?

Often, the best option is the one that provides for regular penalty-free exit points where you can withdraw of all of the funds deposited – not the option that has the slightly higher interest rate.

Saving for a house before Aliyah

It can be more difficult and expensive for someone who is “pre-Aliyah” to gain access to the Israeli banking system. Luckily there are ways to start saving shekels in advance even without an Israeli bank account. In previous articles, we outlined how to use Revolut or Interactive Brokers to buy and store shekels without an Israeli bank account at no additional fee. These are also good platforms to consider for saving in shekels if you are already living in Israel and:

• Have the majority of your income or savings in the US
• Are receiving help from a family member in the US towards your down-payment.

Most prospective home buyers can skip the rest of this article – the core concepts have been covered. The acronym KISS (Keep It Simple Stupid) reflects the right philosophy for most savers. For a detailed video interview on important considerations when purchasing a property in Israel, click here. For those still not satisfied, read on at your own risk!

Alternative short-term investing strategies

While some of the following options may sound interesting, most or all are likely not worth the risk involved for a short-term investor. If you are considering any of these investment, I strongly recommend doing thorough independent research. While I will be mentioning some of the core risks to keep in mind, I certainly won’t be offering a deep analysis of these investments and your individual circumstances will obviously not be taken into account. I do help Olim develop their own comprehensive investment and savings plan – please feel free to reach out if you are interested in additional guidance.

Why discuss these at all? I think one of the best ways to reduce FOMO and future regret is knowing more about other options out there and why they aren’t right for you in a particular situation. There will always be opportunities for greater returns but risk and return go hand in hand. Approaching any investing or savings goal with confidence in your decision and the right expectations are two of the most important factors for successfully achieving that goal. I will discuss some basic strategies as well as others that are far more complex.

Basic strategies

The following are basic strategies which although not necessarily recommended, are usually easy to implement.

Keeping the money in USD

For those drawing on US based funds, it may be tempting to open a regular online FDIC insured “high-yield” savings accounts and keep the funds safe in there until needed. Another option for those with very large cash holdings is to take advantage of a service like Max cash management to easily spread out savings and get the most interest and FDIC coverage as possible.

Keep in mind that almost all Israeli real estate today is priced and sold in shekels and no one has any idea where exchange rates are headed, especially in the short-term. The very low interest you earn from these accounts won’t be meaningful at all if exchange rates go in the wrong direction. Sure, the exchange rate could also move in a beneficial direction but trying to predict short-term exchange rates is nothing short of gambling. As discussed above, there are ways to start saving in shekels from anywhere in the world.

The worst option of all is to keep your funds in a US checking account that requires you to be physically present in order to wire the money out. Before leaving any significant funds in a traditional US checking or savings account after Aliyah, make sure your bank allows for remote wire requests.

Short-term USD bond funds

One approach in the US for keeping funds relatively stable, while hopefully earning a bit more than in your checking account, is by buying funds that hold short-term government bonds and money market instruments. Many of these mutual funds and ETFs are designed to have much less sensitivity to changes in interest rates and have very low volatility. Similar to any low-risk USD investment, interest rates are very low and changes in the exchange rate can easily move returns into negative territory as just described.

Kupat Gemel Lehashka’a

A Kupat Gemel LeHashka’a is a unique tax-advantaged fund in Israel in which your investment remains liquid and available to withdraw at all times without penalty. There are different investment tracks you can choose including lower risk tracks and tracks can be switch without paying taxes. Because of the adverse tax consequences for US taxpayers (PFIC) this fund is generally a bad choice for an American. If you are not American and want to learn more, here is a good article on this product.

Don’t forget to consider all the fees associated with this product when deciding if the potential returns in the short-term justify making the investment. In some cases, the fees will dwarf the expected short-term return of the lower risk tracks making it an unwise choice.

PTP lending platforms

A peer-to-peer lending platform is a type of direct lending, where money you add to the platform is split up and lent out to different individuals or businesses and you in return receive a share of the interest payments. Some popular Israeli peer-to-peer platforms include Blender, Tarya and BTB Israel.

One of the major risks of using these platforms for a short-term savings goal is what’s known as liquidity risk. Essentially, the ability of these platforms to provide you immediate access to withdraw all your funds is highly questionable. During the last major liquidity crisis in 2008, most of these platforms didn’t yet exist. There isn’t much data available on how peer-to-peer loans would perform during a time of panic.

These platforms are likely not built to service a high-volume of withdrawal requests at the same time and getting all your money out when you need it might not be possible. In addition, these platforms take on significant credit risk – meaning, there is a real possibility of significant losses in the event that many individuals or business can’t pay back their loans at the same time. Keep in mind that these platforms are often lending to individuals and businesses who were declined credit from traditional banks.

Series I Savings Bonds

Discussed previously in several articles, Series I Savings bonds are an attractive investment to many US citizens because they are considered mostly “risk-free” and currently have a very high interest rate which adjusts based on US inflation. While these bonds may be a great way to add stability to one’s long-term portfolio, they aren’t designed for short-term down payment saving for several reasons:

• They must be held for at least one year and can’t be traded if the funds are needed sooner.
• If redeemed within 5 years of purchase, you lose 3 months worth of interest as a penalty.
• A maximum of $10,000 can be purchased per year per person
• Redeeming bonds isn’t alway so quick. If any sort of security alert is triggered, Treasury Direct may require an extra security step whereby you must have a specific form notarized and mailed in to the treasury in order to proceed with the transaction.

More complex strategies

If you aren’t particularly interested in finance you will most likely want to skip this section and move down to our last topic – debt. These strategies are generally more difficult to implement and/or understand.

Shekel bond bullet strategy

A bond bullet strategy is a method for buying bonds where all the bonds you buy mature at the same time. This strategy can be beneficial if you have a specific date you will need the funds and are careful to only purchase bonds that have the same maturity date. By buying government rather than corporate bonds, the investor can also usually reduce the risk that these bonds will default. Buying bonds denominated in shekels help eliminate exchange rate risk.

Practically, there are some significant issues that make implementing this strategy difficult and potentially unappealing:

• Most people don’t a have specific date in mind for a major purchase like a house. If interest rates are rising significantly and you are forced to sell these bonds prematurely you will likely lose money.
• Short-term Israeli government bonds currently have very low interest rates and once you factor in the trading/monthly costs of an Israeli brokerage account your return may be negative.
• Researching and buying individual bonds can be extremely tedious. Finding quality bonds selling at a price that would generate a positive return if held to maturity may be impossible with a short time-frame.

Low-cost broad market index funds

An index fund is a basket of investments such as stocks or bonds that are designed to track a specific index. Examples of very popular indexes are the S&P 500 which includes around 500 of the largest US stocks and the Bloomberg Barclays US Aggregate Bond Index which tracks all major types of US bonds. One example (not a recommendation) of a such a fund is VT, the Vanguard Total World Stock ETF in which you can gain exposure to most of the world’s stock markets and own close to ten thousand stocks with a single fund purchase.

While broad market low cost index funds are likely the single best tool for long-term investors, their use for short-term savings is a far riskier proposition. Keep in mind that on average, the US stock market drops by 10% or more at least once every 2 years, drops by 20% or more every 7 years and experiences a crash (drop of 30% or more) every 12 years.

Obviously these are just averages and owning other types of assets within an account can reduce risk but even a very broadly diversified portfolio can see significant drawdowns in a crisis. Finding the right short-term balance can be especially complex in an environment like we are in today where equity valuations are still high and interest rates remain relatively low.

Risk parity portfolios

Risk parity is an investment style which moves away from the traditional investing approach (i.e. 60% stocks, 40% bonds) and seeks to reduce risk and maximize return by investing in a broad range of different asset classes with “negative correlation.” Essentially, the goal is to buy assets that tend to move in different directions in the hopes of achieving higher returns with less ups and downs than a “regular” portfolio. These types of portfolios can also use leverage or leveraged ETFs to increase exposure toward one asset class without reducing exposure to another asset class.

These portfolios can be complex to manage and rebalance, and aren’t designed for very short time frames. For examples, check out Risk Parity Radio.

LifeGoal ETFs

Recently launched, LifeGoal ETFs are designed to simplify complex risk parity style portfolios into a single, easy to buy ETF targeted toward a specific goal. The Home Down Payment Investment ETF (ticker: HOM) was specifically built to help people set aside money for a down payment.

Despite some very clever marketing, the bottom line is that HOM is an actively managed fund with a very short track record. Additionally, the fund is obviously designed to keep up with home price inflation in the US, not Israel. With a huge portion of the portfolio focused on bonds, your exposure to exchange rate risk amongst other risks would be very significant. This may be an interesting idea to know about but not particularly relevant to the Israeli investor.

Hedged equity ETFs

There has been a steady increase in newer investment products which use advanced options strategies to try and limit potential downside while maintaining some exposure to the upside. Simplify convexity ETFs and Innovator buffer ETFs are two examples of companies who have launched a series of ETFs designed to help investors limit drawdowns.

These product are extremely complex to the say the least and should definitely not be used unless you understand how they work and how they would fit into your portfolio.

More investing or less debt?

To conclude this article, I wanted to discuss a classic debate that rages around mortgages and debt. Let’s say, miraculously, through a combination of sources you managed save 50% of the value of the home you want to purchase – should you put as much money down as possible or take the biggest mortgage you can get and invest the rest? Broken down simplistically, here are two general schools of thought:

1. Debt should be reduced as much as possible – Paying off debt or reducing the debt you need to take has a guaranteed return on your investment in all the extra interest payment you won’t need to make. You aren’t likely to find many investments with a guaranteed return. Debt and larger interest payments puts a strain on your cash flow and limits your ability to regularly invest every month. In other words, debt gives the bank (and changes in interest rates) more control over your monthly budget then you may be comfortable with.
2. Why would you want a smaller mortgage? A mortgage is one of the cheapest loans you can get. Sure there is “bad debt” like credit cards but a mortgage is “good debt”. Building a globally diversified portfolio with the extra funds you don’t put into your down payment will likely earn a lot more over the long-term than the extra interest you are paying for the loan. Every millionaire and billionaire utilizes debt to build and grow wealth, why shouldn’t you?

Practically, a true comparison can only be made after thorough research on the terms of each mortgage, a full understanding of the total cost of the purchase, and a well thought out plan for how you would invest the funds leftover. You also need to make sure you are saving enough to cover immediate living expenses and an emergency fund. Beyond that, there clearly is truth to both sides of this argument and there is obviously room for lots of middle ground. I think the majority of people will likely find themselves in the less-debt camp and that makes a lot of sense. However, for those with a good investment plan who are looking to build financial independence quickly, door #2 may be more appealing.