BoI Clarification Aims at Dampening Mortgage Market

The Bank of Israel has notified the banking industry that it does not permit a loan taken on an existing home to be used to buy another home, Globes reported on Sunday.

This comes amid a rush of mortgage lending and a growing demand for homes.

However, the BoI inserted the message in a draft circular sent to the banks, in the form of questions and answers. To the question “May a bank extend an additional loan to be considered ‘equity’ for the purposes of calculating loan-to-value on the home being purchased?” the answer is “No, a banking corporation may not extend an additional loan intended to serve as equity for the purposes of purchasing a home.

The central bank also stressed that this is not a change of policy but a clarification of the original equity restriction, and states that “in effect, the practice that has developed is 100% finance for a home, with the addition of further collateral for the loan, and this was not the intention.”

Clarification of the clarification will not be forthcoming for the time being. The Bank of Israel said, “The Banking Supervision Department does not comment on interpretations of a consultative draft. We will be able to comment after the discussions are complete and a final draft is formulated.”

The measure is intended to prevent the following scenario: If someone has a home worth NIS 2 million on which there is no mortgage, it would seem that it would be possible to take an “all-purpose” mortgage loan of up to 50% of the value of the home, that is, NIS 1 million, and use it to buy another home worth up to NIS 2 million.

The loan taken on the first home serves as equity for buying the second home. Since the second home is bought for investment, I can obtain a mortgage loan of up 50% of the value of that home as well.

It’s become a widespread practice, in part due to the BoI’s having introduced a relaxation during the pandemic, permitting an all-purpose mortgage loan to be taken of up to 70% of the value of an existing home, but made clear that this could not be used as equity in the purchase of an additional home. The bank is now hardening its stance, and objecting to the practice even with a 50% all-purpose mortgage loan raised on the first property, Globes explained.

The Bank of Israel claims that this is not a change of policy but a clarification of the original equity restriction, and states that “in effect, the practice that has developed is 100% finance for a home, with the addition of further collateral for the loan, and this was not the intention.”

Jonathan Berliner, chairman of the professional committee of the Mortgage Advisers Association, was critical of the BoI:

“Six months ago, the Bank of Israel cancelled the restriction limiting variable rate mortgages to one-third of the total loan, with the aim of supporting the real estate market, but in fact adding fuel to the price rises. Now it is trying to cool demand again with a measure that will harm small investors and move-up buyers,” he charged.

Kan news on Sunday evening reported on a proposal from “senior government officials” for a compromise, citing sources.

The proposal contains several points: a re-examination of the legal status of the site and the possibility of legalizing it; most of the residents will have to leave and the homes left empty; erection of a military post or educational institution at the site; if the outpost can be legalized, then residents will be allowed to return to their homes in the future.

The proposal has not been finalized and could change at any time, or come to nothing, Kan said.

However, for Prime Minister Naftali Bennett any viable compromise would be welcome rather than the scenes of confrontation and destruction which are immediately threatening, and could undermine his fragile coalition, as well.