"When a customer takes a variable interest loan, the risk transfers from the bank to the customer," Supervisor of Banks David Zaken told "Globes", in explaining the rationale behind the Bank of Israel's decision to limit variable interest mortgages.
"Two years ago, we warned that granting mortgage loans at interest rates linked to the prime rate was dangerous, but neither the borrowers nor the banks listened. Although we're currently in a low-interest environment, the trend is rising fast. According to the Bank of Israel's Research Department, the interest rate will rise within a year by another 1-1.5%, and the risk to borrowers will grow."
"Globes": If that is the case, why did you limit all variable interest rate loans, instead of only loans linked to the prime interest rate?
Zaken: "It is important to understand that the problem isn't just variable interest loans linked to the prime rate, but all variable interest loans. The interest risk exists in both interest-linked loans and unlinked loans, as well as foreign currency linked loans where there is exchange rate risk.
"The public has an illusion that it's possible to switch from variable interest rate plans to fixed interest plans at no cost. That is not correct, because when a customer wants to switch it will be too late. The fixed interest rate will be higher, and the customer will be trapped."
What is the operative significance of the new directive?
"Today, you benefit, but there's a risk and it's possible that in retrospect you chose the expensive plan. Now, in the short term, mortgage loans will cost more, but their risk will be reduced.
"The customer will switch from a cheap, high-risk plan to a more expensive but lower-risk plan. In the long term, it is possible that the fixed interest rate will be cheaper because all interest rates are rising, but in any event, your risk as a borrower will be less."
In the wake of your decision, what do you think the rise in the mortgage interest rate will be?
"The average mortgage loan will be 1% more expensive."
The directive is not aimed at lowering home prices
As usual at the Bank of Israel, Zaken declined to call the real estate market a bubble, nor does he consider the new directive as a measure that will bring down home prices. At best, that will be a side effect of the directive.
Is there a real estate bubble?
"There is a problem, which is why we intervened. Is there a bubble? I can't say."
Will home prices fall?
"There might be an effect on demand for mortgages, which will cause home prices to fall. The directive is not designed to lower home prices, but to reduce the risk to borrowers and the banks."
If home prices fall, is there no concern about a blow to the banks?
"For there to be damaged to the banks, there must be harm to the ability of borrowers to repay loans and to their guarantees. Today, we're in the seven good years. If the ability to repay is affected, and the default rate rises sharply, and home prices fall sharply as well, we'll see the banks take losses. Then we'll see which bank gave the better quality mortgages."
In such a scenario, is there a risk to bank stability?
"Obviously, financial soundness would be affected in an extreme scenario."
If the current measure to calm the market does not succeed, what will you do next?
"We'll see how the measure affects the market. If necessary, we have more measures that we can take. Our magazine isn't empty."
Published by Globes [online], Israel business news - www.globes-online.com - on April 27, 2011
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