The Bank of Israel on Wednesday issued stricter new draft guidelines on mortgages, requiring lenders to limit monthly payments to 50 percent of monthly income and the mortgage duration to 30 years. The limitations also limited the variable interest on loans to 66.7%.
The Bank explained that the new limitations were intended to reduce future risk to borrowers, noting that significant proportions of mortgages were given at high repayment rates and over long periods of time. Likewise, overexposure to variable-rate interest rates could see people’s mortgages rates shoot up over time.
“These characteristics contain a future risk to borrowers, where there is a concern that they have taken on heavy commitments,” Banks Supervisor David Zaken explained in the guidelines.
Limiting risk is intended not only to safeguard borrowers, but also the banking system as a whole; one cause of the US financial crisis in 2008 was large numbers of borrowers defaulting on their mortgages at once, leaving banks struggling to make up the cash.
Shmuel Ben-Arieh, Director of Market Research at Pioneer Financial Planning, explains: If a couple earning NIS 10,000 a month takes a variable-interest mortgage paying NIS 4,500 at today’s rates, they could end up paying well over NIS 5,000 if those rates go up. That could make it tough both for them to pay their mortgage, and for the banking system.
“In my estimation, the ratio of the variable interest component should be much more limited,” he says. “It seems that of all times, now, when the interest rate is low and inflation expectations are low, it would be more correct to increase the portion of the mortgage that is fixed. That would allow young couples to conduct better-planned and more secure financial lifestyles.”
Few economists believe the spike in the Israeli real estate market is a bubble waiting to burst, and the bank has previously enacted capital requirements to limit over-leveraging. The new limitations are a way to further minimize risk.
Yet the rules were also met with criticism over how they would affect potential home-buyers and renters.
Labor faction leader and former housing minister Itzhak Hertzog demanded the Bank freeze the regulation, which he called anti-social and unreasonable.
The new rules “will make it harder for for tens of thousands of young couples to get an apartment, and will turn Israel into an island of housing for the rich alone, with ghettos of poverty. Thousands of young people will be forced to find their way in the out of control rental market,” he said.
Efforts should instead be directed at bringing down the cost of housing, he added.
Ron Cohen, CEO of real estate developer Eldar, worried about the repercussions on the buying market, noting that it would push some buyers toward renting instead.
“The current steps taken by the Bank of Israel will lead to a further increase of rent prices,” he said. “Is the state interested in young couples living with their parents?”