Israel Tightens Mortgage Rules, Potentially Blocking Homeowners' Loans

Starting October 1st, the Bank of Israel is implementing new regulations aimed at increasing oversight of household debt capacity, specifically concerning loans taken against existing property.

The core change involves how banks calculate a borrower's debt-to-income ratio (PTI) for "loans for any purpose" secured by a property. Previously, banks assessed a borrower's ability to repay a new loan based on their "disposable income" after accounting for their existing mortgage. Under the new rules, banks must sum the monthly payments for both the existing mortgage and the new loan, and calculate the combined PTI against the borrower's total net income.

This stricter calculation method is expected to disqualify many borrowers. For instance, a family earning NIS 20,000 net monthly, with a NIS 6,000 mortgage payment, seeking a new loan with a NIS 4,500 monthly repayment would have previously been approved, as the NIS 4,500 represented about 32% of their remaining NIS 14,000 disposable income. Now, the combined NIS 10,500 payment constitutes 52.5% of their total income, exceeding the 50% absolute limit and likely leading to rejection.

The Bank of Israel states the goal is to prevent excessive household leverage, ensure borrowers have sufficient funds for living expenses even with rising costs, and maintain the stability of the banking system. However, industry professionals criticize the move, warning it will push borrowers towards more expensive non-bank lending channels. They argue that banks should have more discretion to assess individual cases, especially when new loans are intended to consolidate higher-interest debts.

Additionally, a separate upcoming regulation will limit the extent to which parents' income can be counted when co-signing loans for their children, further restricting access to credit for some families, particularly young couples and those in traditional family structures.