It’s been quite a month. Started off with a family vacation trip of a lifetime to Dubai, followed by my 40th birthday celebration. My wife got me an awesome watch, and my folks got me a super cool bike, my kids gave me lots of hugs and kisses, and other fun times were had. Yet the biggest present came from an unexpected source, namely the Bank of Israel, who announced an update to their mortgage guidelines, that are designed to make the costs of borrowing against Israeli property lower. A wonderful gift, that will allow me to help my clients save lots of money on their mortgage.
First, some basic background regarding the Israel mortgage guidelines in question: Stanley Fischer, the well-known economist, was chairman of the Bank of Israeli from 2005 till 2013. Towards the end of his term, after observing that Israeli borrowers were constantly choosing to take variable-rate mortgages (where the rate can adjust each month), and having borne witness to the payment shock issues many US homeowners faced during the 2008 financial crisis when adjustable-rate mortgage rates suddenly spiked, Fischer decided that Israelis needed to be protected from their own risky nature. He instituted two rules, that are still in effect today: The first, that every Israeli must borrow at least 33% of his overall loan on a FIXED rate. This guideline remains unchanged. The second rule, that no more than 33% of their total loan can be “exposed” to a variable rate, is now being rolled back and discontinued.
The rationale is simple. As the economy strives to get back on track, and with many people still reeling from the financial carnage that COVID-19 has left in its wake, the Bank of Israel now believes that Israelis should be allowed to decide for themselves how much of their mortgage they choose to take on a variable mortgage, with a caveat as long as it is not higher than 66% of the overall loan. For many, the risks of increased exposure on an adjustable-rate mortgage, namely the risk of a rising interest rate and increasingly higher monthly payments down the road, are simply not as high a priority as their current daily struggles. They need relief NOW, and these new guidelines are supposed to reduce the average Israel mortgage effective interest rate by around 0.5%, bringing effective interest rates into the low 2% range.
In typical Israeli fashion, the news seems to have disrupted the market and created quite a buzz, but it is still theoretical. They’ve now announced the measure, and have given us firm dates they will become effective ( January 17th for new purchases, and February 27th for refinances of existing mortgages). One major question remains, and the success of these new mortgage guidelines in Israel will depend largely on it. The adjustable-rate is comprised of the index (usually referring to the Prime lending rate, which today is at 1.6% and holding steady) plus a predetermined, arbitrary set margin. The standard margin the banks have offered over the past several years on this loan product has ranged from around -0.7% to -0.2%. It will be interesting to see if these margins stay in line with previous levels, in which case the financing costs will indeed go down, as designed and expected. However, should the bank arbitrarily decide to increase the margin to +0.5% to +1%, which would surprise no one, it would likely have the opposite effect. Namely, the cost of borrowing would increase.
Additionally, it still remains to be seen what the impact will be on the rates on the fixed-rate loans, as the guideline that at least 33% of any given loan must be on a fixed rate remains in place. If the banks increase the fixed mortgage rates, which some suspect they will, as a measure to preserve their own previous profit margins, the new guidelines could spell higher rates for the general public in Israel, which is exactly what these measures are designed to AVOID.
What will happen? No one knows. But starting January 17th, as banks in Israel issue mortgage approvals based on new guidelines, the picture will begin to clear. We have some very interesting times ahead.
Dani is a senior mortgage broker at First Israel Mortgages, where he has successfully executed an efficient and smooth approval and loan funding process on behalf of hundreds of clients in Israel and abroad. Dani can be reached at [email protected], on his Israeli cell +972-54-332-5370 or direct US cell +1-917-675-5605.