Israel's Central Bank Tightens Mortgage Rules, Impacting Young Couples

The Bank of Israel has updated its mortgage lending regulations, potentially making it harder for young couples, even with parental financial backing, to purchase their first home. The new directive from the banking supervisor limits the extent to which banks can consider the income of relatives, specifically parents, when assessing a borrower's ability to repay a loan. This change, effective from November 2, clarifies that banks may only count up to half of a parent's income if they are not listed as owners of the property being purchased.

Previously, some banks allowed for a more significant portion of parental income to be factored into loan assessments, even if parents were the primary borrowers and solely responsible for mortgage payments without owning the property. The Bank of Israel's clarification states that even in such scenarios, no more than 50% of the parent's disposable income can be considered. This restriction applies regardless of the actual amount the parent contributes to the monthly payments, aiming to reduce household over-indebtedness.

The new rules stipulate that a monthly mortgage payment should not exceed 50% of the borrower's assessed disposable income. If this ratio surpasses 40%, banks are required to hold more capital, making the loan less profitable. Consequently, a family might be denied a mortgage not due to insufficient funds but because the calculation method limits the inclusion of parental income. For instance, a couple with a net income of 10,000 shekels and a father earning 30,000 shekels, willing to cover the entire mortgage, might be denied if the 13,000 shekel monthly payment exceeds 50% of their combined calculable income (10,000 plus half of the father's 15,000), even though their total actual income is 40,000 shekels.

These changes are expected to disproportionately affect young professionals early in their careers, such as doctors, whose current incomes may be lower despite future earning potential. Individuals participating in government housing programs with restrictions on parental co-ownership may also face additional hurdles. Liran Sela, General Director of Sela Investments and Finance, warned that such requirements could block access to mortgages for individuals with strong long-term financial prospects.

The Bank of Israel cites the need to mitigate risks of excessive household debt as the reason for tightening controls. While a similar restriction on counting non-owner relative income existed since 2015, the current clarification specifically addresses situations where parents are the sole borrowers and fully cover payments. This update follows recent changes in October regarding the assessment of borrowers seeking additional loans against existing property.

It remains unclear how many families will be affected, as the Bank of Israel lacks public statistics on the use of this specific lending mechanism. The directive does not include transitional provisions, though it is assumed that pre-approved applications will not be impacted. Young couples planning to buy homes must now recalculate their potential mortgage amounts, as parental willingness to fully fund the loan no longer guarantees their income will be fully considered.