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Bank of Israel mortgage reforms signal more transparency for borrowers

Bank regulator rolls out measures meant to simplify mortgage-taking process for customers and give them better knowledge of options

Bank of Israel Governor Amir Yaron speaks during a press conference at the Bank of Israel in Jerusalem on January 7, 2019. (Noam Revkin Fenton/Flash90)
Bank of Israel Governor Amir Yaron speaks during a press conference at the Bank of Israel in Jerusalem on January 7, 2019. (Noam Revkin Fenton/Flash90)

The Bank of Israel (BOI) announced a series of reforms on Sunday meant to make the process of taking out a bank mortgage more transparent and competitive for borrowers, the bank said.

BOI issued instructions to Israeli banks to present potential mortgage-takers with three uniform options on interest rate tracks to facilitate the process, increase transparency and promote better understanding, and generally make it easier for borrowers to compare between banks.

The new measures will allow customers to submit an application for a mortgage online, and ensure that the banks provide all who qualify with a standard initial approval in a uniform format within a few days of the request.

The banks are then required to offer three interest rate tracks: 100 percent fixed unindexed; 1/3 fixed unindexed, 1/3 variable indexed and 1/3 indexed to the prime rate; and 1/2 fixed unindexed, 1/2 indexed to the prime rate.

A majority of mortgages in Israel are composed of a number of tracks, which leads to more flexibility for borrowers but adds complexity.

According to the new plan, the banks will also be required to provide the total projected interest rate, the total forecast payments for the entire mortgage period, and the highest possible monthly payment according to the forecasts, as well as simulation calculators for different mortgage plans.

These measures, said BIO, “will increase the power of the customers and thus improve the competitive environment in the market.”

BOI announced significant reforms last year to Israel’s mortgage policy reversing previous limits on variable rates in bank loans given for house purchases. The bank previously only allowed for a third of any mortgage to be repayable according to a variable interest rate linked to the prime rate, while at least two-thirds must be taken at a fixed rate.

The change allowed Israelis to take up to two-thirds of their mortgages with a variable interest rate.

“A mortgage is the largest financial commitment in the lives of most households, but mortgage borrowers today have difficulty understanding and comparing offers without deep financial knowledge,” said Bank of Israel Governor Amir Yaron.

“The series of measures we are promoting are designed to give customers more power and make it easier for them to make one of the most significant financial decisions in a more informed way, and even help the economic conduct of the household currently and in the future,” he added.

Israel has been facing a housing crisis for at least a decade that is seeing prices climb significantly.

According to a recent study by the Alrov Institute for Real Estate Research at Tel Aviv University’s Coller School of Management, the average cost of a four-room (three-bedroom) apartment in Israel stands at NIS 2.2 million ($682,608), and the average equity required for a minimum 30% down payment and surrounding expenses was estimated at about NIS 840,000 ($261,140).

Despite these hardships, the value of mortgages taken by Israelis this past August hit a record high of NIS 11.9 billion ($3.7 billion). In October, the value of mortgages stood at NIS 10.7 billion ($3.45 billion), according to BOI.

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