People buying homes as an investment will no longer be able to get mortgage terms comparable to those provided to first-time home buyers, after the Bank of Israel moved to close a loophole that had enabled investors to buy property in their children’s names.
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The new rule, which was issued last week by Banks Supervisor David Zaken, comes after an earlier effort at clamping down on property speculation failed to achieve its aims. Last October, Zaken ruled that investors — defined as those who already own at least one piece of residential property — would not be allowed to take out a mortgage to finance more than half of the price of the property they are acquiring. By contrast, those buying a primary residence can continue to get mortgage financing of up to 75%.
But banking sources said that in practice, the rule had been rendered toothless because investors began registering the investment properties they were buying in their adult children’s names and have them apply for the mortgage. In order to meet the rules requiring that mortgage repayments not exceed half of a borrower’s monthly income, the children would list their parents as additional lenders. In many instances it was clear that the buyer did not have income sufficient to meet the mortgage payments and that the parents were subsidizing them.
Now, for purposes of gauging whether the buyer has income equivalent to double the mortgage payment, Zaken has ordered that the contribution of parents be limited to half of their disposable income.
The latest rule comes as the central bank tries to cool off the overheated real estate market. Officials are concerned that rising home prices and growing mortgage debt could lead to a national crisis if economic growth slows and unemployment rises, leaving people with loans they can’t repay. The bank has been steadily toughening the terms for taking out mortgages, although they have had little effect on either prices or borrowing.
On Sunday, however, the Bank of Israel reported some progress in reducing homeowner leveraging. It said that homeowners were paying less of their income on their monthly mortgage payments in March than they had been about a year earlier. The average March payment represented 27.3% of the borrower’s income, compared with 30.2% a year earlier.
It attributed the drop to the tougher borrowing terms Zaken imposed last November requiring that borrowers have income equivalent to at least double their monthly payment. In cases in which the borrower’s income is between 40% and 50% of the mortgage payment, banks are also required to have addition capital to protect against the risk of the borrower’s defaulting.
As a result, the volume of mortgages falling within the 40% to 50% income range fell from 393 million shekels ($113.6 million) in March of last year to a low of 139 million shekels in March this year. Some of that drop is artificial, however, to the extent that increasingly parents’ income had been included in the monthly income for purposes of the calculation. That may change due to Zaken’s crackdown on the loophole, but a banking source said it would have only marginal impact on lending.
Mortgage banks will now also require parents helping their adult children buy a home to issue a standing order from their bank for at least a quarter of the monthly mortgage payment in cases in which the parents are providing half of the recognized income. This will mainly affect poorer borrowers, banking sources said, particularly home buyers in the ultra-Orthodox community, where it is common practice for parents to be formally added to mortgages to meet the minimum-income requirement.
Although there may be some who try to get around the requirement by having the child issue a standing bank order to the parents for the same monthly amount, banking sources said the tougher rules will make the parents’ obligation more concrete and may make them think twice before attaching their name to their children’s mortgages. The banking sources said the new rule may also make it difficult for others in lower-income brackets to buy a home.