BOI guidelines limit mortgages to 50% of income, 30 years

The limitations will also limit the variable interest on loans to 66.7%; the new limits were met with some criticism.

By
August 21, 2013 17:26
2 minute read.
The cost of building a straw bale house is similar to that of a conventional one.

House in the north 370. (photo credit: Courtesy Sarah Kopp)

 
X

Dear Reader,
As you can imagine, more people are reading The Jerusalem Post than ever before. Nevertheless, traditional business models are no longer sustainable and high-quality publications, like ours, are being forced to look for new ways to keep going. Unlike many other news organizations, we have not put up a paywall. We want to keep our journalism open and accessible and be able to keep providing you with news and analyses from the frontlines of Israel, the Middle East and the Jewish World.

As one of our loyal readers, we ask you to be our partner.

For $5 a month you will receive access to the following:

  • A user experience almost completely free of ads
  • Access to our Premium Section
  • Content from the award-winning Jerusalem Report and our monthly magazine to learn Hebrew - Ivrit
  • A brand new ePaper featuring the daily newspaper as it appears in print in Israel

Help us grow and continue telling Israel’s story to the world.

Thank you,

Ronit Hasin-Hochman, CEO, Jerusalem Post Group
Yaakov Katz, Editor-in-Chief

UPGRADE YOUR JPOST EXPERIENCE FOR 5$ PER MONTH Show me later Don't show it again

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.

Be the first to know - Join our Facebook page.


“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?”

Related Content

The Teva Pharmaceutical Industries
April 30, 2015
Teva doubles down on Mylan, despite rejection

By GLOBES, NIV ELIS