This was reported this morning (Wednesday) by Calcalist. According to estimates, a binding directive will be issued in the coming weeks requiring banks to allocate higher capital for credit extended to contractor financing deals, aiming to reduce the profitability of such promotions. The Bank of Israel neither confirms nor denies the report.
By Dror Nir Kastel, Nadlan Center
The Bank of Israel plans to tighten conditions in the coming weeks on “balloon loans” and various financing promotions such as 20/80 or 10/90, which many development companies have adopted over the past year to increase sales volumes. This was reported this morning (Wednesday) by Calcalist. The move is driven by the growing risks in the real estate sector. According to estimates, a binding directive will be issued in the coming weeks requiring banks to allocate higher capital for credit extended to contractor deals, aiming to reduce the profitability of these promotions. The Bank of Israel neither confirms nor denies the report.
When a homebuyer pays a low down payment at the time of signing, banks must provide developers with higher financing. The Bank of Israel’s concern stems from the fact that when the initial payment is 10%-20%, the buyer does not engage with a mortgage bank but instead funds it through personal savings or by taking a non-housing loan, meaning their repayment ability is not assessed. This assessment occurs only when the remaining 80%-90% of the property’s price is due, by which point the contract is signed and difficult or impossible to withdraw. Since banks are forced to cover the financing gap, the Bank of Israel seeks to tighten the conditions for such financing and reduce risk.
Another financing model combines these promotions with a balloon loan. In this case, the buyer pays 20% or less of the property’s value at signing, secures a mortgage—typically covering 40%—and commits to paying the remaining 40% to the developer at the end of the term. This mortgage is structured as a balloon loan, meaning the buyer commits to repaying it in 2-3 years while making only interest payments in the meantime. However, the developer subsidizes the buyer’s interest payments. From the buyer’s perspective, they receive an interest-free mortgage during the construction period, while the developer benefits from lower costs, as subsidizing interest payments for the buyer is cheaper than the alternative—failing to sell the apartment—or allowing the buyer to pay the full amount at the end of the term.
Balloon loans have gained popularity in recent years. In May, the volume of these loans stood at 1.29 billion shekels, and in June, a new record of 1.321 billion shekels was set. From January to June 2024, the volume of balloon loans grew by 70%, according to an analysis of Bank of Israel reports. In May, these loans accounted for about 16.5% of new mortgage volume, increasing to 17% in June, whereas in “normal” years, they comprised only 6%-8%. By December, the figure reached an all-time high of 1.43 billion shekels, though it has declined in recent months.
The main risk in these promotions is the uncertainty surrounding buyers’ ability to meet their payments at the time of apartment delivery. If housing prices drop or interest rates rise, buyers may be unable to meet their mortgage payments, potentially leading to financial difficulties for both them and the banking system. Additionally, these financing promotions could distort housing market prices, as they effectively serve as a discount on the apartment price while maintaining artificially high official listing prices. Recently, the Israel Securities Authority instructed public companies to reflect balloon loan costs in their financial reports.
Balloon loans are of less concern to the Bank of Israel because the buyer undergoes a mortgage process and receives bank approval confirming their ability to meet the payments. However, the real estate sector faces cash flow challenges, and external factors, such as geopolitical shifts, can change the landscape. Despite balloon loans appearing to be safer, according to the report, the Bank of Israel is also considering imposing restrictions on them based on a certain percentage of the property’s value. This approach has already been adopted independently by Bank Leumi, which decided not to grant balloon loans to buyers who have not paid at least 20% of the property’s value in equity. Additionally, they have capped balloon loans at 40% of the property’s value.
The Bank of Israel responded: “As we have stated before, we are closely monitoring developments in the housing market and the housing and construction credit sectors. If necessary, the Bank of Israel will act using relevant tools from the available range.”
