| The Supervisor of Banks, David Zaken, today published a draft directive regarding housing loans at variable interest rates. The new directive will apply to loans approved in principle from May 5, 2011. The new directive is a continuation of previous steps taken by the Bank of Israel and the Banking Supervision Department. |
| The directive limits the part of a housing loan (mortgage) issued at a variable rate of interest to one third of the total housing loan granted by a bank to the borrower. The limit applies on new variable-interest-rate housing loans where the interest rate is likely to change in a period of less than five years. |
| The directive also sets out a disclosure requirement, obliging banks to advise customers who have in the past taken housing loans at variable interest rates indexed to the prime rate of interest, where the indexed component of the loan is one third or more of the total loan. The objective of the disclosure requirement is to increase the awareness of those borrowers to the possible effects of a rise in the interest rate on their monthly payments, and to help them assess this risk and the possibility of reducing it. |
| The draft directive was published in light of continued trends in the house market, primarily the significant volume of housing loans granted at variable interest rates, which incorporate an inherent risk to borrowers, and consequently to the overall banking system. The risk is entailed in the possibility that the interest rate will rise and will markedly increase borrowers’ monthly mortgage payments, to an extent that will impact on their repayment ability. This scenario has become more realistic in light of the current trend of rising interest rates in the economy. |
| The Bank of Israel notes that many financial crises that have occurred in other countries began with housing credit granted under terms that did not reflect the risks developing in the sector, and that were inappropriate in light of the rapid rise in housing prices. The new directive is intended to prevent developments of this type, for the interest of the public and the whole financial system. |
| The draft directive will be discussed soon by the Advisory Committee for Banking Issues, following which a final directive will be drawn up. |