MKs: Protect first-time home buyers, young couples

Ministers warn stricter mortgage guidelines that will make loans more expensive threaten vulnerable groups.

May 26, 2010 23:40
3 minute read.
construction projects in modiin

construction modiin 311. (photo credit: Ariel Jerozolimski)

The Bank of Israel should exclude first-time home buyers and young couples from new guidelines affecting mortgages, Construction and Housing Minister Ariel Attias said Wednesday.

“Since the announcement by the Bank of Israel, there has been a freeze by [aspiring] home buyers,” he told the Knesset Finance Committee. “I am in favor of the new guidelines as a means to dampen the demand of investors, reduce risks and lower home prices, but not at the expense of first-time home buyers and young couples. Therefore, first-time home buyers should be excluded from the new rules.”

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Supervisor of Banks Rony Hizkiyahu on Monday announced new regulations for mortgages that will make loans more expensive for home buyers seeking a mortgage of more than 60 percent of the value of an apartment.

“The guidelines were formulated in response to macroeconomic and industry processes that caused housing price increases in many areas in Israel over and above the rise in the standard of living and household income,” the Bank of Israel said Monday. “These processes are also expressed in an increase in the number of loans and in the average size of loans, and they are likely to result in continued erosion of the quality of housing credit portfolios and increased risk in the total portfolio.”

According to the guidelines, banks will be required to put aside an additional provision of 0.75% for mortgages over 60% of the purchase price of a home. Until now, banks have been lending home buyers up to 70% of the price of a home. As a result of this additional cost, banks are expected to raise the interest rate on mortgages that cover more than 60% of the value of an apartment.

Mortgages would become more expensive, but the exact cost will depend on each bank, Moshe Perel, chairman of the Association of Banks, said Wednesday.

“About 30% of mortgages issued are for apartment purchases for investment purposes,” Deputy Supervisor of Banks Ori Sofer said Wednesday. “As a result of the guidelines, the cost of mortgages will only go up an estimated 0.1% or 0.2%. If the interest rate on a mortgage is 3%, the change will increase the rate to 3.1% or 3.2%.”

One-fifth of mortgages granted today cover more than 60% of the value of a home, he said.

“The big question we are all asking ourselves is what will happen as a result of the guidelines,” Knesset Finance Committee chairman Moshe Gafni said Wednesday. “If the aim is to create a situation that is less attractive for investors, or to make it more difficult to invest in a second or third home, then it is reasonable.

“But if the decision will [make it difficult for] young couples, I disagree. We are not interfering with the bank’s decision, but a balance needs to be struck so that young couples can have a roof over their heads.”

MK Haim Oron suggested an alternative measure for making it more difficult for investors to buy property.

“For example, an increase in purchase taxes for second- and third-home buyers would not be a less effective measure to reduce investments threatening the stability of the financial system,” he told the committee. “The current guidelines should differentiate between the periphery and the center and between first- and second-home buyers.”

Bank of Israel Deputy Governor Zvi Eckstein said it was unlikely the guidelines would be changed.

“The increase in the mortgage interest rate is minor when weighed against the central bank’s responsibility to support financial stability and reduce risks,” he told the committee. “The measure we have taken is our independent decision, and it is nonnegotiable.”

The new guidelines require banks to reexamine their credit and mortgage portfolios to ensure they are not overly risky.

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