Israel Bank Supervisor Tightens Mortgage Rules as Credit Surges

The Bank of Israel announced new limits on mortgages designed to shield borrowers and the financial system from risk as housing credit surges and the economy slows.

Under the new rules, monthly mortgage repayments must not exceed 50 percent of monthly household income and the maximum mortgage will be limited to 30 years, Supervisor of Banks David Zaken said in an e-mailed statement from Jerusalem today. The rules go into effect Sept. 1.

Credit to buy homes has climbed, along with housing prices, as the Bank of Israel cut interest rates from 3.25 percent in 2011 to 1.25 percent today in a bid to boost growth. Banks’ housing loans rose to 234 billion shekels ($65.5 billion) in June, up about 15 percent in 18 months, according to the central bank’s statement. Mortgages accounted for about 28 percent of the balance sheet of the five biggest banking groups as of March 2013, up from 20 percent in December 2007, the central bank said.

“We see a very problematic scenario of a possible rise in interest rates and an increase in unemployment,” Zaken said on a conference call with reporters. “It’s comfortable for everyone to ignore this risk; we aren’t ignoring the risk.”

He also limited the variable-rate interest portion of a loan to two-thirds. Until now, the central bank had not linked monthly payments to income or capped mortgage length.

The tightening comes against a backdrop of slowing economic growth and rising joblessness.

Unemployment Rising

Unemployment has risen to 6.9 percent in June from 6.5 percent in January. Growth is expected to slow in 2014 to 3.2 percent from 3.8 percent this year, according to a Bank of Israel forecast in June.

“The Bank of Israel is continuing its effort to cool the housing credit market,” Adi Scop, a financial services analyst for I.B.I.-Israel Brokerage & Investments Ltd. said in an e-mailed statement from Tel Aviv. “The new rules aren’t expected to hurt bank profitability significantly, but they will slow growth of housing credit to weaker borrowers.”

Mizrahi Tefahot Bank Ltd., the lender most exposed to housing credit, declined as much as 4 percent following the announcement. It was trading at 39.54 shekels at 3:15 p.m. in Tel Aviv, down by 1.4% from its opening price.

Israel was not among the housing markets that imploded across the globe in the past decade, in part because of relatively conservative lending practices. Its banks did not offer sub-prime mortgages similar to those that brought down the U.S. housing sector.

In recent years, the Bank of Israel has become even more restrictive in lending to home buyers. Last October it set maximum loan-to-value limits for the first time, and in February, it told lenders to set aside more money against losses from home loans.

Before it's here, it's on the Bloomberg Terminal.