The Bank of Israel is introducing three measures to cool the overheating mortgage market in Israel. The value of mortgages taken in June this year reached an all-time record monthly high of NIS 11.6 billion. This followed relaxations by the Bank of Israel removing restrictions on the amount of the floating rate element in a mortgage package.
The first measure that the central bank is taking now is to bring into force the guideline issued as a consultative draft forbidding the use of a loan taken out using a current dwelling as collateral, to be used to buy another dwelling. In other words, cash raised through an all-purpose loan backed by a mortgage on an existing home will not count as equity for the purposes of the LTV (loan-to-value) restrictions on a mortgage taken to buy another property.
Nevertheless, in order to enable move-up buyers to buy new homes before they have sold their existing homes, a bank will be allowed to extend an additional, bridging loan for the purposes of completing the finance required for the purchase. The period of such a loan may not exceed the maximum period allowed by the Tax Authority for selling the existing home before the new home is considered an investment property incurring higher rates of purchase tax.
Not waiting for the Finance Ministry
Two further updates by the Bank of Israel relate to relaxations introduced when the coronavirus pandemic broke out that are due to expire at the end of September this year. The first allows an all-purpose loan to be taken amounting to 70% of the value of a property on which it is secured. The second suspends the requirement for banks to allocate tier-1 capital amounting to 1% of the value of a mortgage loan extended under temporary guidelines. Both these measures will not be renewed.
The Bank of Israel is not waiting for the Ministry of Finance's comprehensive plan for dealing with failures in the housing market. Its moves follow remarks by Minister of Finance Avigdor Liberman to the effect that the banks should exercise caution in extending mortgage loans. In an interview with "Globes", Liberman took a dig at the Bank of Israel, saying that the current level of new mortgages "hasn't been seen since the days of the First Temple," and called on the banks to act responsibly.
Supervisor of Banks in the Bank of Israel Yair Avidan said, "Today we published a number of measures concerning risk and exposure management in the banking system. I am happy that after extensive dialogue, we have managed to find a solution that allows the activity of move-up buyers while placing a certain limit on those who buy for investment purposes and are not move-up buyers.
"It's important that, when extending a loan, and as part of the responsible contracting process, the lending bank should make use of all the tools available to get to know the customer's financial position well, including the credit data sharing system.
"In addition, we do not intend to extend the validity of two relaxations that were introduced in the face of the coronavirus pandemic. Restoring the rules to what they were before the crisis is part of the process of the economy's recovery and adaptation to managing the economy alongside the continued existence of the virus."
Published by Globes, Israel business news - en.globes.co.il - on August 9, 2021
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