The reform to increase information transparency and competition in mortgages

Surveying the market and examining the possibilities offered by the various banks helps borrowers make decisions under optimal conditions, in order to match their needs and repayment capabilities.

The Competition Authority has found that price comparisons lead to lower prices, and that the more a borrower compares, the lower the average price will be. Thus, a single price comparison leads to an average decline of 7–8 basis points in price, while four comparisons lower the price by an average of 16-20 basis points.

An approval in principle is a document in which the bank presents its approved price quote for a mortgage. One of the improvements made by the mortgage transparency reform is that the approval in principle is now a more detailed document with a uniform structure at all banks.

Due to the reform, the request for approval in principle and accompanying documents can be sent online, and it is not necessary to physically go to the bank. The bank is required to send the customer its approval within 5–7 business days from when the mortgage request is submitted.

The new approval in principle form is comprised of three parts.

The first part, which appears at the top of the document, includes details on the borrower’s identity (name and ID number), details of the property, the requested loan amount, and whether guarantors are required for the loan.

The second and main part presents three uniform baskets that the banks are required to offer, in accordance with the mixes and other conditions set by the Bank of Israel. The approval may include an additional offered basket that will be composed according to the customer’s request.

The third part includes a number of variables that are intended to enable the borrower to better understand the financial significance of the offer he receives, and to make it easier for the borrower to compare it with other offers. These include the total forecast interest, the amount of the initial monthly payment, the amount of the highest expected monthly payment according to forecasts, and the total amount the borrower is expected to pay until the end of the loan period.

The approval in principle is valid for 24 days from the date it is issued. During that period, the bank is bound by the terms it has offered, with two important conditions. The first is that the information provided by the customer is correct. The second is that should there be any changes in the Bank of Israel interest rate, those changes will affect the prime interest rate in line with the margins approved in the approval in principle.

An assessor’s valuation is an assessment of the property’s value by an authorized assessor. The valuation is done in cases where the bank requires it. It serves in the approval of the loan’s financing rate relative to the value of the property (LTV rate). In cases where the assessor’s valuation is higher than the price of the property, the LTV rate will be set in accordance with the price of the property.

The LTV (loan-to-value) rate is the ratio between the approved mortgage loan and the value of the property. The value is set according to the price of the property or in accordance with an assessor’s valuation, as determined by the bank.

A bank offering mortgage loans must restrict the LTV rate on the property as follows:
1. Housing loan for the purchase of a single dwelling – The LTV rate shall not exceed 75 percent of the value of the dwelling.
2. Housing loan for the purchase of a replacement dwelling – The LTV rate shall not exceed 70 percent of the value of the dwelling.
3. Housing loan for the purchase of an investment dwelling, or all-purpose loan backed by a residence – The LTV rate shall not exceed 50 percent of the value of the dwelling.

A loan for which the payment-to-income (PTI) ratio is more than 40 percent is considered a high-risk loan, so the cost to the borrower of such a loan is expected to be higher. A large portion of the loans banks provide have payment rates that are 30–40 percent of the borrower’s income. We suggest taking a loan that will enable reasonable payments, while taking into account potential changes in interest and inflation that can be expected over the loan period, in accordance with forecasts.

*) Fixed unindexed
*) Fixed indexed
*) Variable based on the prime interest rate
*) Variable indexed
*) Variable unindexed

Fixed unindexed: A monthly payment that is fixed at the time the mortgage is taken out and does not change throughout the loan period.

Fixed indexed: The interest rate is fixed at the time the mortgage is taken out. While the interest rate is fixed and does not change throughout the life of the mortgage, the principal (the loan amount excluding interest) is linked to the Consumer Price Index, and is updated on a regular basis according to changes in the CPI. This affects the amount of the monthly payment. Any increase in the CPI (for instance, by 1 percent), raises the monthly payment on this track by the same rate (in this case, 1 percent).

Variable based on the prime interest rate: In this track, the principal is not indexed to the CPI, but the payment varies, because it is based on the prime interest rate. The prime interest rate is the Bank of Israel interest rate, which is set and published by the Bank of Israel Monetary Committee 8 times a year, plus a fixed addition of 1.5 percent. For instance, if the Bank of Israel interest rate is 1 percent, the prime rate is 2.5 percent. On this track, where the interest rate is linked to the prime rate, the interest that the borrower will pay over the life of the mortgage can increase (if the Bank of Israel raises the interest rate) or decline (if the Bank of Israel lowers the interest rate).

Variable indexed: In this track, the interest rate is set for a period of a number of years (usually 5 years), and at the end of each period, it changes on the basis of a pre-agreed parameter called the “anchor”. In the uniform basket, the anchor is the yield on government bonds. At the end of each period (usually five years), the interest rate increases or declines in accordance with the change in the anchor. In this track, the principal is indexed to the CPI and updated in accordance with changes in it, which also affects the amount of the monthly payment.

Variable unindexed: The interest on this loan is set for a period of a number of years (usually 5 years), and at the end of each period it changes on the basis of a pre-agreed parameter called the “anchor”. In this track, the principal is not indexed to the CPI.

The mortgage mix is a loan comprised of at least two tracks. As part of the mortgage reform, customers will be offered three uniform baskets. Each basket is a predetermined mix that is identical in all offers that will be received from all banks.

The following are the compositions of the three uniform mixes:
1. 100 percent fixed unindexed.
2. 1/3 fixed unindexed; 1/3 variable indexed, every five years, based on government bonds; and 1/3 variable prime.
3. ½ fixed unindexed and ½ variable prime.

The terms for obtaining an eligibility loan are set by the government, and obtaining one requires the issuance of an eligibility certificate. However, in terms of providing credit, the bank is bound by the same procedures as under a normal mortgage. The level of an eligibility loan is set according to various criteria set out by the government, and the interest on such loans is 0.5 percentage points lower than the average interest rate on CPI-indexed loans provided by the banks—the rate published by the Bank of Israel—or 3 percent, whichever is lower. Borrowers who wish to pay off eligibility loans before the end of the loan period are exempt from early payment fees.

For further explanations and to check eligibility, it is recommended to visit the Ministry of Housing’s website.

For mortgages issued to purchase a dwelling at reduced price through government programs, the bank is permitted to calculate the LTV rate on the loan based on an assessor’s valuation of the dwelling instead of the actual purchase price, and the purchaser must pay at least NIS 100,000 out of his own sources. IN any case, the value of the dwelling for the purpose of calculating the LTV rate shall not exceed NIS 1,800,000 (based on the assessor’s valuation), or the actual value of the dwelling, whichever is higher.

Mortgage payments for a new dwelling or for a dwelling as part of a program to strengthen an existing building against earthquakes, such as through National Outline Plan (NOP) 38, are paid as percentages of the construction price and by construction stages in the dwelling or the building in which it is located. Accordingly, the pace of withdrawing mortgage amounts from the bank will be according to the stages detailed in the sales regulations and according to progress in the construction.

When withdrawing a mortgage in stages, it is important to remember that the interest on the amount remaining to be withdrawn on fixed or variable interest tracks may also decline or increase in accordance with the market conditions relevant to the track.

The necessary documents may vary from bank to bank, but they generally include salary slips, current account statements, identity documents, and so forth. The list of required documents will be provided with the approval in principle.

Banks commonly require the borrower to ensure the property for which a mortgage is taken out. The insurance serves as a guarantee that the mortgage will be repaid, and also serves to protect the borrower in the case of death or of damage to the building, in accordance with the terms of the policy.

Yes. If you have already taken out a mortgage, there is room to check whether you should replace it with a different mortgage, meaning to refinance it. If you would like to check refinancing possibilities, the bank where your mortgage is handled is required to show you information that will help you decide whether such a move is worthwhile for you—the interest that is forecast on the outstanding payments, taking into account the amount you will need to repay (including early payment charges and other potential fees); and the nearest date at which the interest rate is expected to change, which may also have a significant impact on how attractive mortgage refinancing may be.

Mortgage refinancing is basically the repayment of a mortgage by taking out another mortgage. Refinancing is necessary in order to significantly change the terms of a mortgage during the repayment period. A material change is any change in the interest terms, the mix of tracks, the loan period (extending or shortening the repayment period), the total loan amount, and so forth.

Mortgage refinancing is a step that should be considered from time to time. Refinancing is generally done when there are changes in the market conditions or in the borrower’s financial state, which have made refinancing worthwhile:
- Changes in the borrower’s income or expense level
- Changes in the interest rates in the economy and/or in the mortgage market
- Changes in inflation
- Regulatory changes in the mortgage field (such as the mortgage reform, cancellation of the prime rate restriction, and so forth)