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Bank of Israel Restricts Mortgages Severely, Looking to Avert Future Real Estate Crises

The new directive stops banks from giving mortgages with an LTV of more than 70%, with an exception for first-time buyers.
Supervisor of Banks David Zaken

Supervisor of Banks David Zaken
Photo Credit: Yossi Zamir/Flash 90

The Bank of Israel’s Supervisor of Banks David Zaken on Monday published a draft directive limiting the loan-to-value (LTV) ratio in housing loans, as of November 1, Globes reported.

The new directive stops banks from giving mortgages with an LTV of more than 70%, with an exception for first-time buyers, who are allowed mortgages of up to 75% of the value of the apartment.

Mortgage customers who buy an apartment for investment will be limited to 50% LTV. The directive will go into effect after a discussion in the Advisory Committee on Banking Matters.

The Bank of Israel announced:

“In recent years, we have seen negative developments in the housing market and the housing credit market. The draft directive has been published against the background of the marked increase in recent years in the balance of housing credit and the increase in home prices in Israel. Recent trends in the housing market indicate an increased number of transactions, an increase in the monthly level of mortgages granted and an increase in investors’ volume of activity, among other things against the background of the low interest rate environment in mortgages.

“These developments impact on the risk level inherent in the banks’ credit portfolio – the accelerated increase in the housing credit portfolio on banks’ balance sheets is liable to include risks to the stability of the banking system, primarily in light of the correlation between the housing credit portfolio and the construction and real estate credit portfolio. These represent, as of June 30, 2012, about 40 percent of total balance sheet credit risk.”

According to the Bank of Israel, many of the recent financial crises in foreign countries began with granting housing credit at terms that did not reflect the risks developing in that market.

The new directive is intended, says the Bank of Israel, to reduce the effects of a crisis in the real estate market by reducing the risk inherent in taking out a housing loan with a high loan-to-value ratio.

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