Israel – Israel’s banking regulator on Wednesday toughened mortgage rules for the second time this year as it seeks to reduce the risk of housing loans in banks’ credit portfolios.
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The Bank of Israel said housing loans at Israel’s five largest banks rose to 28 percent of their balance sheet credit as of March from 20 percent at the end of 2007.
It noted that 17 percent of mortgages are granted to those whose monthly repayment is more than 40 percent of monthly income, while some mortgages are longer than 30 years and a significant portion of mortgages are at variable rates.
“These characteristics contain a future risk to borrowers, where there is a concern that they have taken on heavy commitments, and who under certain circumstances may not meet mortgage repayments in view of the increase in the ratio between the outstanding balance of the mortgage and disposable income,” the central bank said.
It added that the risk is implicit in the possibility that interest rates, which are currently very low, may increase in the future and sharply raise mortgage payments, as well as a possible economic downturn that could hurt the labour market.
Israel’s key interest rate stands at 1.25 percent. Low rates since the global financial crisis began in 2008 have helped fuel Israel’s housing market, leading to a spike in prices.
Under the draft guidelines issued by Supervisor of Banks David Zaken, banks as of Sept. 1 must not approve a housing loan in which the monthly repayment exceeds 50 percent of monthly income. On loans between 40 and 50 percent of monthly income, they will be weighted at 100 percent for the purpose of calculating the capital adequacy ratio.
Mortgages cannot be for more than 30 years and banks may not approve loans where the variable rate interest tops two-thirds of the loan.
In February, Zaken had tightened mortgage regulations by increasing the weight of high loan-to-value ratios in calculating the capital adequacy ratio. [ID:nL6N0BJ9BG]
It sounds like a good housing loan regulation . I am not a champion of regulations at all, on the contrary, I am very free-market/free-trade oriented but this piece of regulation should significantly reduce risks on housing loans.