Bank of Israel Tightens Mortgage Conditions as Housing Market Heats Up

Banks will no longer be allowed to issue mortgages where the portion of the loan with variable interest is above two thirds the entire loan.

Banks Supervisor David Zaken tightened mortgage lending on Wednesday in a bid to keep borrowers solvent if interest rates rise or the labor market worsens. The bank pointed to mortgages’ large and increasing share in total bank credit in recent years.

Under the new guidelines, banks will no longer approve mortgages with monthly payments greater than 50% of the borrower's monthly income. Also, banks will have to set aside 100% capital for residential mortgages with monthly payments between 40% and 50% of the borrower's income.

This last move is expected to significantly increase interest rates for borrowers seeking this kind of product. Banks will also no longer be allowed to issue mortgages where the portion of the loan with variable interest is above two thirds of the entire loan.

This new restriction joins an existing one that limits variable-interest financing in loans under five years to one-third the total loan value. Banks will also be prevented from issuing mortgages longer than 30 years.

"The proposed guidelines are aimed at reducing the risks for mortgage borrowers and the banking system as whole,” the Bank of Israel said.

According to the central bank, 17% of Israeli mortgages have monthly payments over 40% of the borrower's income, while 72% are partly financed with variable interest. Also, some mortgages are longer than 30 years.

While some people responded by saying that the ones to be hurt were young couples and people of lesser means, others countered by calling the restrictions justified as a move to prevent a disaster given the growing pace of mortgage borrowing.

TheMarker reported on Wednesday that the public is on track to take out some NIS 5 billion in new mortgages in August, according to banking sector figures. At this pace, 2013 will become a record year for mortgages, with NIS 53 billion in financing.

The total sum of mortgage debt in Israel doubled over the past six years, to NIS 252 billion - or 30% of Israeli banks’ total credit.

Those who expressed the most displeasure regarding the move were, not surprisingly, the parties involved in home sales.

“On the one hand, the state isn’t taking real steps to lower home prices, such as cutting taxes or land prices, and on the other hand the Bank of Israel is repeatedly making it more difficult for young couples to buy homes,” said Ronnie Cohen, CEO of Eldar Marketing. “The current move will push up rental prices. Does the Bank of Israel want young couples to be living with their parents?”

“The bank’s move causes disproportionate harm to the 16% of all borrowers who were approved by banks to take out mortgages with payments equal to more than 40% of their net monthly income,” said Idan Elkabetz, a partner in consulting company Atid Mortgages. “Nearly all of them are of lesser means.”

He estimated that the stricter lending measures would cost these people NIS 150 a month, or an extra NIS 45,000 over the life of the mortgage in real terms, presuming an average NIS 700,000 mortgage.

Adina Hacham, CEO of Anglo-Saxon real estate, said the move wouldn’t stop people from taking out large mortgages, so long as interest rates are low.

“This move and others only goes to show that the Bank of Israel doesn’t believe that home prices in Israel can fall, and the impression that it’s projecting is that prices are going to increase,” she said.

Chairman of the Israel Real Estate Appraisers Association Ohad Dannus noted that with a 4-room apartment currently costing an average of NIS 1.1 million, and given that prior restrictions state that borrowers need to put up at least 25% of the money themselves, then this means young couples need to earn at least NIS 10,000 a month in order to buy such a home with a 25-year mortgage.

He noted that the latest restriction is unlikely to harm people buying apartments for investment purposes, though.

Yet his predecessor Erez Cohen called the move justified, stating that given lending rates, Israel could well find itself in the middle of a mortgage-fueled crisis like the one that hit the United States.

The sharp appreciation in home prices means that borrowers need mortgages averaging NIS 1 million, up from NIS 500,000 five years ago, he said.