The Bank of Israel today published a new directive to limit variable interest mortgages. The directive will apply to new loans approved from May 5, 2011.
The directive limits the part of a mortgage issued at a variable interest rate to one third of the total mortgage granted by a bank to the borrower, down from 76% today. The Bank of Israel said that the new measure would make the average mortgage 1% more expensive. The limit applies on new variable interest rate mortgages where the interest rate is likely to change in a period of less than five years.
The directive also requires banks to advise customers with variable interest rate mortgages linked to the prime interest rate where the indexed component of the loan is at least one-third of the total loan, about the possible effects of a rise in the interest rate on their monthly payments, and how to assess and reduce the risk.
The Bank of Israel published the new draft directive because of continued trends in the housing market, in particular the significant volume of variable interest rate mortgages, which involve an inherent risk to borrowers. Specifically, the central bank points to the risk that higher interest rates will affect borrowers' ability to meet their monthly payments, jeopardizing the banking system. The risk is real given that the Bank of Israel is raising interest rates.
The Bank of Israel notes that many financial crises that have occurred in other countries began with housing credit granted under terms that did not reflect the risks developing in the sector, and that were inappropriate in light of the rapid rise in housing prices. The Bank of Israel said that the new directive was intended to prevent a similar development in Israel, in the interest of the public and the whole financial system.
Published by Globes [online], Israel business news - www.globes-online.com - on April 27, 2011
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