Draft update to banking system directive: updating housing loans with variable interest rate

The Banking Supervision Department sent the banking system a draft circular, according to which it was decided to cancel the limitation of the share of the prime rate component in a mortgage’s composition, and to suffice with the variable interest rate limitation, according to which at least one-third of the total mortgage is to be given at a fixed rate of interest, and the remaining up to two thirds can be chosen by borrowers without any limitations.

 

Supervisor of Banks Yair Avidan said, “In view of the conditions currently in the market, we found it correct to remove the prime-rate limitation in the mortgage composition, and thus make it easier for borrowers, while maintaining the required balances at the borrower level and at the banking system level. The current step will make it easier for mortgage borrowers and will increase the range of financing possibilities available to them.”

 

In the past decade, the Banking Supervision Department has taken a range of macroprudential steps in view of housing market developments. Among other things, the Supervisor of Banks established limitations on the share of the housing loan at a variable interest rate out of the total loan. The first limitation is that the Prime interest rate share of the loan is not to exceed a third of the total loan, and the second limitation is that the overall share of the loan at a variable interest rate is not to exceed two-thirds of the total loan.

 

In view of the considerable experience accumulated over the years, developments that occurred in the housing market, and an analysis of the possible ramifications of an increase in interest rates on borrowers’ risk and the risk in the housing credit portfolio, we found that there could be an easing for mortgage borrowers, enabling them to let go of the one-third Prime rate limitation. This, while maintaining the balances between the benefit to borrowers with the increased flexibility in taking a mortgage and the level of risk to which these borrowers are exposed and the level of risk in the banking system’s housing credit portfolio. This process can contribute to reducing the interest payments paid by the borrowers—a need that has become more acute in the coronavirus crisis period.

 

The discussions on the issue also included a dialogue with Members of Knesset Mickey Levy, Yair Lapid, and Dr. Shlomo Karhi.

 

The proposed amendment was distributed today to the Advisory Committee on banking matters, and after discussing its comments and those of the public, a final guideline will be formulated within several weeks.​