The Bank of Israel on Wednesday announced new measures to limit variable- rate
housing loans, ending several days of speculation about an imminent move after
it decided earlier in the week to keep the benchmark interest rate at 3
Under the new directive, which will apply to mortgages approved
in principle from next Thursday, the part of a housing loan issued at a variable
rate of interest will be limited to one-third of the total housing loan granted
by a bank to the borrower, down from the current limit of 76%. The limit applies
to new variable-rate housing loans where the interest rate is likely to change
in a period of less than five years.
“The draft directive was published
in light of continued trends in the house market, primarily the significant
volume of housing loans granted at variable interest rates, which incorporate an
inherent risk to borrowers, and consequently to the overall banking system,” the
central bank said in a press release.
“The risk is entailed in the
possibility that the interest rate will rise and will markedly increase
borrowers’ monthly mortgage payments, to an extent that will impact on their
repayment ability,” it said. “This scenario has become more realistic in light
of the current trend of rising interest rates in the economy.”
directive will be discussed soon by the Advisory Committee for Banking Issues,
after which a final directive will be drawn up, the Bank of Israel
The central bank indicated last month during discussions about the
April interest rate that it was considering introducing macro-prudential
measures to cool the housing market. Since then, there have been regular reports
in the media that Bank of Israel Governor Stanley Fischer was close to approving
the measure to limit variable interest rates, in addition to a still unannounced
regulation that would limit mortgages to lower than the current accepted average
of 70% of a property’s value.
Avner Buntman, CEO of Mortgage Israel, a
consulting company that caters to the local English-speaking market, said the
new measure would make “purchasing now less affordable for those who should not
“The overall effect is that it’s going to increase mortgage
rates,” he told The Jerusalem Post. “It’s increasing the cost of mortgages in a
significant way for the majority of borrowers. That’s effectively what he
[Fischer] has done here by limiting the choices of what people can
“The variable-rate mortgages now are the ones where interest rates
are the lowest, so he’s taking away the choice of the market to choose those
lower interest rates and forcing them to take mortgages at a higher interest
rate,” he said.
Israel already has different conditions than other
countries, such as the United States, Buntman said.
While fixed rates
overseas generally mean that a rate is fixed for the life of the loan, in Israel
the most prominent option in this category is “a fixed-rate madad loan,” which
is also linked to inflation, he said.
“The crazy thing is, we almost
never recommend to clients the fixed-rate madad loan, because historically
speaking it’s been the most expensive… So he’s basically telling the market you
have to take two-thirds of your mortgage in the option of loan that, at least
according to our analysis, we don’t recommend,” Buntman said.
recommend it because they like it: they make money off it,” he
Alternatively, Buntman said, the restriction on variable-rate loans
“will force people to search out other fixedrate mortgages in other
There are some banks who offer a five- or 10-year fixed-rate
dollar loan, for example, but [they are] not so popular, so you’ll likely see
more demand for some of those products [now], fixed-rate non-shekel
Foreign-currency-linked mortgages are loans linked to other
currencies for fixed terms. For example, with a dollarlinked mortgage, the
currency of loan and repayment is in shekels according to the dollar
Investment house analysts were overwhelmingly critical of the Bank
of Israel’s move on Wednesday, saying it would not cool down the housing market
as the bank hopes.
“In our estimation, this move is not expected to cool
down the real-estate market, and according to our understanding, it does not
even pretend to do that since it does not limit the value of a mortgage that one
can take, but rather only the composition,” Harel Finance head of economics and
research Michael Sarel said.
Fischer should consider alternative measures
if rising housing prices are of such concern to him, he said, such as raising
interest rates even further or introducing measures that limit the value of
mortgages as a percentage of a property’s value.
Clal Finance chief
economist Amir Kahanovich also said the move would fail to achieve its intended
“As long as the interest rate does not rise, or there is no
significant change to housing supply, it is difficult to see prices falling,” he
Meanwhile, Globes reported prior to Wednesday’s announcement that
Fischer had summoned the CEOs of all of Israel’s banks for an urgent meeting on
Thursday morning to discuss the mortgage market. Summoning an urgent meeting is
extraordinary; the last time Fischer did so was at the height of the global
financial crisis and market panic in late 2008.