By Moshe Wilshinsky
At the end of August, the Bank of Israel (BOI) issued an announcement limiting how banks can lend to mortgage borrowers. The Bank of Israel website, refers to this as “draft guidance for consultation with the Advisory Committee on Banking regarding limitations on the granting of housing loans (mortgages)”. In this case, “draft guidance” could be compared to a father telling his five-year-old son not to hit his sister again with his toy GI JOE if he wants to keep it. While not getting into a question of free choice, my analogy is to illustrate my point that “draft guidance” may not be understood in the context that is in fact used, meaning that your mortgage will need to conform. There were three primary “guidelines” (as the BOI website refers to them and I would like to focus on the second guideline: a limitation on variable loans and loan term.
But before I do so, allow me to give you a little history to better understand the context of the latest announcement. In 2010, the BOI issued directives for the first time that directly affected how and what mortgage borrowers could do. It was a wakeup call to the mortgage industry that there was a regulator that was actually going to be reviewing their loan files. Most importantly, non-compliance would not just be a slap on the wrist, but would cost serious money (alas-but that is an article in itself). At that time (and through a few consecutive amendments), the BOI limited an Israeli borrower’s ability to take a mortgage at whatever terms they wanted and limited them to take no more than 1/3 (many banks adopted a limit of 32%) of their loan amount with adjustable interest rate loan terms.
In case you have not taken a mortgage since before then, and you do not know what that means, in March 2010 a borrower with a Israeli teudat zehut who took a NIS 1,000,000 loan based on the Prime Interest Rate or based on the 3-month LIBOR, was not able to do that a few months later. Instead, he was forced to take only NIS 320,000 based on the 3-month LIBOR and the rest as “fixed” interest rate loans. (I use the quotation marks around the word fixed because an interest rate linked to the Madad is considered fixed, but as a mortgage professional who started in the mortgage industry in the United States in the 1980s, I believe that if the cost of that fixed rate changes every month with inflation, it can’t be called a fixed anything.) Until this latest directive was issued, the balance of the loan could have been in a loan with a term of 30 years and an interest rate fixed for five years. It should be noted that in 2002, the BOI forced a standardization of the mortgage banks prepayment penalties. Prepayment penalties were another ramification after the 2010 regulation was introduced that borrowers who wanted short or medium term financing had to deal with. (Eventually, that was dealt with in 2010, and the regulation exempted “bridge-loans” that had a loan period of a few years or less.)
Let’s take a look at the actual wording used by the BOI on their press release published on their website:
“A banking corporation shall not approve a housing loan where the portion of the loan at variable-rate interest exceeds 66.7 percent (two-thirds) of the loan. This limitation shall apply to loans with variable rate interest of all durations, and comes in addition to the existing limitation limiting to one-third the portion of a housing loan granted at variable-rate interest for a period of less than five years.”
Breaking this down, the first part of this statement says:
“A banking corporation shall not approve a housing loan where the portion of the loan at variable-rate interest exceeds 66.7 percent (two-thirds) of the loan.”
The term “variable-rate interest” means that the interest rate on your loan changes sometime before the loan term is up. For example, if you have a 30-year-loan and the interest rate adjusts every 15 years, it is called a variable-rate interest loan because the interest rate may vary.
“This limitation shall apply to loans with variable rate interest of all durations…”
This makes it very clear that the loans with a fixed interest rate for five years or more and loan terms that were much longer (e.g. 15 to 30 years) are variable-rate interest rate loans and are being included in the limitation of 66.7% of the loan amount.
“…and comes in addition to the existing limitation limiting to one-third the portion of a housing loan granted at variable-rate interest for a period of less than five years.”
This means that the previous legislation regarding 1/3 of the loan amount having adjustable terms without a minimum term still applies.
So what this all comes down to is long-term fixed rate mortgage terms. The BOI is requiring every borrower to take 1/3 of their loan amount with an interest rate that is fixed over the entire term of the loan. My regular readers know that this is an issue that I have written about before. However, the major difference is that I have always favored rates that are not linked to the Madad (inflation) over those that are. I have not seen anything in the legislation that recognizes that differentiation.
The reason why I am in favor of long-term fixed rate loans is because I believe that when borrowers are deciding what type of mortgage to take, they need to take into account that there is a high enough probability of interest rates increasing in the future. It seems that the BOI shares this concern, and this is part of their new regulation.
Is their answer conveying a message to those that have their head in the sand, by pulling them by the hand and forcing them to hear?
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd.
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