Bank of Israel directive on maximum financing percentage

6/11/2012

At the end of October, the Bank of Israel published new guidelines that limit the percentage of financing a home buyer can receive from a bank as a mortgage.

Click here to read the Bank of Israel directive

According to the Bank of Israel's directive, apartment buyers will be divided into three groups:

First-time homebuyers.

b. Home upgraders – Homeowners who buy an apartment but commit to selling their currently owned apartment.

c. Investors.

Each borrower will be classified by the bank into one of three groups. The borrower's eligibility for a specific financing percentage will be determined by their group classification:

A. First-time homebuyers can receive a mortgage from the bank for 75% of the value of the home they are purchasing.

B. Homebuyers may receive from the bank 70% of the value of the apartment purchased with a mortgage.

C. Investors can obtain a mortgage from the bank for 50% of the value of the apartment being purchased.

The bank will classify a customer into one of three groups using a declaration that the customer will bring to the bank after filling it out with a lawyer and the lawyer signs it.

The use of an EMI company to obtain loans with higher financing percentages will no longer be possible from now on. In light of this, the EMI company announced to the stock exchange that it will not accept new customers. The company will operate on a reduced scale, serving its existing customers.

A previous directive from the Bank of Israel, which stipulated that a loan exceeding 60% is considered a high-risk loan and therefore the bank granting such a loan is subject to a fine, remains in effect. As a result, for loans exceeding 60%, borrowers receive less favorable terms from the bank.

The Bank of Israel is trying to achieve two goals through this directive:

1. Improvement in the robustness of banks. The Bank of Israel is concerned that most of the banks" credit is concentrated in one sector (real estate) and thus the banks' risk will increase due to a problem in this sector.

2. A decrease in apartment prices. Following the Bank of Israel's directive, fewer people will be able to purchase apartments. Demand will decrease, and consequently, the Bank of Israel hopes that housing prices will fall.

Time will tell if prices will actually drop following this directive.