Central bank moves to limit financing offers on new homes

Fearing an increased level of borrowing risk for buyers of unfinished new homes, Israel’s central bank said Sunday it would impose new restrictions on financing packages offered by developers.

The new directive by the Bank of Israel’s Banking Supervision Department will restrict contractors’ abilities to offer deferred payments and balloon loans through the end of 2026, it said.

Shortly after Hamas launched its war with Israel on October 7, 2023, contractors began offering these riskier types of loans to customers, who were more averse to buying homes due to the uncertainty of the situation. However, the central bank said, the trend has intensified in recent months, posing increased risk for buyers and developers and possibly even the banking system.

Such arrangements are now used in 50 percent of all new housing purchases, compared to 20% before the war, the Bank of Israel said in February. These types of loans are risky because they encourage buyers to make purchases they might be unable to complete, it explained.

For deferred payment plans, in which more than 25% of the sales price is not due until the delivery of the home at the end of construction, the banks financing the developers must show increased readiness for the possibility that the sale might fall through. Lenders will now be required to have capital available of 150% of the credit granted, a move that will make it more expensive for builders to obtain such financing and less attractive to offer it to purchasers.

Balloon loans are loans given by the contractor to the customer to be repaid with interest in a lump sum when the apartment is finally delivered. Contractors typically take loans from the banks to offer these to customers, paying some or all of the interest to the bank themselves during the interim. In order to minimize the increased risk of default on these loans, The Bank of Israel now requires that such loans may not make up more than 10% of all the home loans granted by a bank each month, in order to stem their use.

The new guidelines also include additional measures to reduce risk for all parties, the central bank said.

The moves are a further blow to people looking to enter the housing market amid already sky-high prices, existing lending restrictions and high interest rates.

Recent figures showed that housing costs were 7.7% more on average in December-January compared to the same period in 2023-2024, soon after the start of the war.