New Mortgage Rules May Harm Borrowers Seeking Debt Relief

A new regulation set to take effect on October 1st in Israel could inadvertently harm families attempting to consolidate debt or reduce their monthly payments. The updated policy requires banks to calculate a household's debt repayment capacity by considering the total of existing mortgages and any new loans against a property. If the combined monthly payments exceed 50% of a household's net income, the application for a new loan may be denied.

The regulation's stated goal is to protect households from over-leveraging, as dedicating too much income to debt repayment makes them vulnerable to financial shocks like job loss or interest rate hikes. However, critics argue that the rule fails to account for families who are already committed to financial arrangements or are seeking new loans specifically to alleviate existing debt burdens.

For instance, a family earning NIS 20,000 net monthly and paying NIS 6,000 on a mortgage might seek an additional loan with a NIS 4,500 monthly repayment. Under the old system, this loan might have been approved. Under the new rules, the total repayment of NIS 10,500 would exceed the 50% income threshold, potentially leading to rejection.

This change poses two main problems. Firstly, individuals who have already made commitments based on the previous regulations, such as signing contracts for renovations or assisting children with property purchases, might be left without the anticipated financing. Secondly, the regulation could hinder debt consolidation efforts. Families with multiple high-interest consumer loans might be denied a new, lower-interest loan secured by their property if the bank calculates the combined payments of both old and new loans, effectively trapping them with more expensive debt.

Legal experts suggest two necessary adjustments: a grace period for those already in the process of transactions under the old rules, and a specific exemption for loans intended for debt consolidation, where the repayment ratio is calculated based on the household's financial situation after existing debts are settled. The aim is to ensure that regulations distinguish between loans that worsen financial problems and those that offer solutions.