Israel Tightens Mortgage Rules, Potentially Blocking New Loans

Starting October 1st, new regulations from the Bank of Israel will significantly alter how banks assess a borrower's ability to repay loans taken against existing property. The core change involves how the debt-to-income ratio (PTI) is calculated for "loans for any purpose" secured by a home. Previously, banks calculated this ratio based on the borrower's income remaining after their existing mortgage payment. Under the new rules, banks must sum the existing mortgage payment and the new loan payment, then calculate the total debt-to-income ratio against the borrower's gross net income.

The Bank of Israel aims to prevent over-leveraging and ensure borrowers have sufficient funds for living expenses, even amidst economic fluctuations, thereby protecting the banking system. The absolute maximum PTI allowed is 50%, but a critical threshold is 40%. When a borrower's PTI exceeds 40% (but remains below 50%), banks face stricter capital requirements, making loans more expensive or leading to outright refusal.

Industry experts criticize these sweeping changes, warning they could push borrowers towards more expensive non-bank lending. Liran Sala, CEO of Sela Investments and Finance, argues that the new rules prevent logical underwriting, forcing individuals with existing high-interest debts into costly external loans instead of allowing banks to consolidate them at a lower mortgage rate. He likens the regulation to a "guillotine" that lacks flexibility.

An example illustrates the impact: a family earning NIS 20,000 net monthly, with a NIS 6,000 mortgage, seeking a NIS 4,500 loan for renovations. Previously, the NIS 4,500 loan represented about 32% of their remaining income (NIS 14,000), likely leading to approval. Under the new rules, the total monthly payments of NIS 10,500 would constitute 52.5% of their gross income, exceeding the 50% limit and likely resulting in rejection.

Further changes are anticipated regarding "loan reversal," a mechanism where parents co-sign mortgages for their children. New guidelines will limit the recognized income from such co-signers to 50%, potentially excluding many young couples and families who rely on parental support for mortgage approval.