Israel Tightens Mortgage Rules, Potentially Pushing Borrowers to Costlier Markets

Starting October 1st, the Bank of Israel is implementing new regulations designed to tighten oversight of household debt repayment capabilities within the mortgage market. The core change involves how banks calculate the debt-to-income ratio (PTI) for loans secured by existing property. This adjustment is raising concerns in the financial sector, with fears it could push borrowers towards more expensive, non-bank lending options.

The PTI measures the percentage of a borrower's net income allocated to mortgage payments. While the absolute ceiling is 50%, a more significant threshold is 40%. When a borrower's PTI exceeds 40% but remains below 50%, banks face stricter capital requirements from the Bank of Israel, making such loans less profitable or leading to outright refusal. The aim is to prevent excessive leverage, ensure borrowers retain sufficient funds for living expenses amidst potential economic shifts, and safeguard the stability of the banking system.

Previously, when a homeowner sought an additional loan against their property, banks assessed repayment capacity based on income remaining after the existing mortgage payment. Under the new rules, banks must sum the monthly payments for both the existing mortgage and the new loan, calculating the combined PTI against the borrower's total original net income. For example, a family with a NIS 20,000 net monthly income, a NIS 6,000 mortgage, and seeking a NIS 4,500 loan would have previously qualified, as the new loan represented 32% of their remaining income. Now, the combined payments of NIS 10,500 constitute 52.5% of their total income, exceeding the 50% limit and likely resulting in loan denial.

Industry professionals criticize the new directive as a "guillotine order" that prevents nuanced underwriting. They argue that instead of allowing banks to consolidate expensive, high-interest debts into a cheaper mortgage, the regulation forces borrowers into the more costly non-bank sector. Concerns are also being raised about a separate upcoming regulation that will limit the extent to which parents' income can be counted towards their children's mortgage applications, potentially impacting young couples and families relying on parental co-signing.

Data from the Bank of Israel indicates that the average PTI for new loans secured by property was around 24% of disposable income as of August 2026, with average mortgage PTIs at 29.2%. The new combined calculation is expected to push many average borrowers over the 40% threshold, forcing them to seek alternative, more expensive financing.