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Supervisor of Banks David Zaken today published draft guidance for consultation with the Advisory Committee on Banking regarding limitations on the granting of housing loans (mortgages).  The new guidance limits the amount of repayment as a share of income, the portion of the loan that can be granted at variable-rate interest, and the term until the final repayment.  The aim of the guidance is to reduce risk, particularly interest risk, to the public taking out mortgages under terms that could endanger its future ability to repay the mortgage and, as a direct result, the risk to the banking system inherent in such loans.
Following discussion with the Advisory Committee, the new guidance will apply to loans for which approval in principle is granted starting on September 1, 2013.  The new guidance is a continuation of the earlier measures taken by the Banking Supervision Department in the housing credit market.

The main guidelines included in the new draft are:
  1. A banking corporation shall not approve a housing loan (mortgage), the monthly repayment of which exceeds 50 percent of monthly income.  Housing loans where the monthly repayment is between 40 percent and 50 percent of monthly income shall be weighted at 100 percent for the purpose of calculating the capital adequacy ratio.
  2. 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 5 years.
  3. A banking corporation shall not approve a housing loan for a term to final repayment of more than 30 years.

The draft guidance was published in view of the continuing trends in the housing market, primarily the high proportion of housing loans in the bank credit portfolio and its growth in recent years (see Figures 1 and 2), the continued rapid increase in the volume of new mortgages, and their characteristics: A significant portion of mortgages (17 percent) are granted at high rates of repayment out of income (more than 40 percent); a significant portion of mortgages are granted at variable-rate interest, including for periods 5 years and more (72 percent) (see Figure 3); and some mortgages are granted for terms of 30 years and more.  These characteristics contain a future risk to borrowers, where there is a concern that they have taken on heavy commitments, and who under certain circumstances may not meet mortgage repayments in view of the increase in the ratio between the outstanding balance of the mortgage and disposable income (see Figure 4).  This risk is implicit in the possibility that the interest rate may increase in the future and markedly increase the monthly mortgage repayments and the risk inherent in changes in the economic environment, such as a worsening of labor market conditions.  The simultaneous realization of these two risks could increase the impact on borrowers’ ability to repay and increase the risk that they will encounter difficulties in repaying their mortgage.

A direct outcome of this concern, in view of the continued increase in housing prices, the characteristics of the mortgages and the low interest rate environment, is an increase in the risk to the banking system.  The proposed guidance is intended to minimize the risks for those taking out mortgages and for the banking system as a whole.



Figure 1
Distribution of balance sheet credit, the five major banking groups, December 2007 and March 2013
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טיוטת הנחיות בדבר הגבלות על הלוואות לדיור 22.xlsx.png
Figure 3
Weight of variable-rate housing loans1, total banking system,
January 2004 to June 2013
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Figure 4
Housing loan repayments as a share of available income, total banking system, 2004 to 2012
טיוטת הנחיות בדבר הגבלות על הלוואות לדיור 44sx.png