BoI to limit variable-rate mortgages

"The overall effect is that it’s going to increase mortgage rates" CEO of Mortgage Israel says.

Stanley Fischer 311 (photo credit: Bloomberg)
Stanley Fischer 311
(photo credit: Bloomberg)
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 percent.
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.”
The new 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 said.
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 be buying.
“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 take.”
“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.
“Banks do recommend it because they like it: they make money off it,” he said.
Alternatively, Buntman said, the restriction on variable-rate loans “will force people to search out other fixedrate mortgages in other currencies.
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 loans.”
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 rate.
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 effect.

“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 said.
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.