June 24, 2021

BoI puts spoke in wheels of runaway mortgage market

Globes, Eti Aflalo, 24.06.2021

In the face of the rush of mortgage lending and the rise in demand for homes, the Bank of Israel has sent the banks a dramatic clarification stating that it does not permit a loan taken on an existing home to be used to buy another home.

The clarification is currently part of 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. Any additional credit that the banking corporation extends to the borrower will be separate from the home purchase transaction and will be examined according to the bank's normal criteria for the type of additional credit. For the removal of doubt, the above applies both to consumer loans and to loans with a mortgage on another dwelling."

What is the instruction intended to prevent? Suppose I have a home worth NIS 2 million on which there is no mortgage. On the face of it, I can 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 the purposes of 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.

This practice is very widespread in the market, and the Bank of Israel is aware of that. During the year of the coronavirus pandemic, the central bank introduced a relaxation and permitted 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.

The Bank of Israel claims that this is not a change of policy as far as it is concerned 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."

The clarification is still defined as a draft, but it already raises points that will need to be addressed. The first is an arrangement for bridging loans for move-up buyers who buy a new home in place of their existing home and take a mortgage on the existing home as equity on the new home until such time as they sell the existing home. This practice is especially important for those who buy a new home off the plan, when there may be a long period until it is completed, during which the buyers continue to live in their existing home, before selling it.

A further point that needs to be taken into account is that it is possible to take credit from a bank against a mortgage on the existing home, and to declare that it is for some other purpose but in fact to use it as equity to buy another home. Such credit, however, has to be extended under the terms applicable to the declared purpose, which means smaller amounts and shorter repayment periods than apply in the case of a home purchase.

It should be made clear that the Bank of Israel's restriction will not prevent non-bank credit being taken against a mortgage on a home and used as equity for buying an additional home, since the Bank of Israel's instruction does not apply to non-bank lenders. It is important to note, however, that, in general, loans from non-bank lenders are more expensive than bank loans.

A more lenient interpretation given in the mortgage market to the Bank of Israel guideline is that there is no actual bar to using a loan on an existing home as equity for buying an additional home, only that in such a case the loan will not be classified as a housing loan but as an all-purpose loan, which will make it about 2% more expensive.

Jonathan Berliner, chairman of the professional committee of the Mortgage Advisers Association, said in response to the report, "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."

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."

Published by Globes, Israel business news - en.globes.co.il - on June 24, 2021