Consumer reform to increase information transparency for bank customers and to enhance the competitive environment in the mortgage market
- The Bank of Israel announces the advancement of a series of consumer measures in the mortgage field that are intended to make it easier for borrowers in the process of taking out a mortgage in three areas: making the information more transparent and easier to compare, making the documentation simpler and easier to understand, and making the process more efficient.
- As part of the measures, and in addition to the mortgage basket they offer, the banks will be required to provide customers with an initial approval in a uniform format that will present three uniform baskets, the composition of which will be determined by the Bank of Israel, while the length of the loan period will be chosen by the customer.
- In each of the baskets, the forecast total interest rate, total forecast payments for the entire period, and the highest monthly payment expected according to the forecast, will be presented.
- In addition, the time period for granting the initial approval will be shortened to just a few days, and it will be made possible to submit a request and receive the approval online at all the banks.
- As a result of the reform, customers will be able to better understand the terms of the mortgage being offered and the implications of the future payments, make a more informed and easier comparison of various offers from a number of banks, and submit a request for a mortgage offer more rapidly and conveniently. These will also increase customers’ power, and thereby enhance the competitive environment in the market.
- In order to formulate these measures, the Bank of Israel Governor appointed a special team to consult with a number of world-renowned experts in the fields of mortgages and behavioral economics, officials from the Competition Authority, and others. In addition, and in order to optimize the measures, the Bank used focus groups that were comprised of people from a wide variety of backgrounds.
Bank of Israel Governor Prof. Amir Yaron said, “We have decided to advance a significant consumer reform that will have a direct impact on all mortgage borrowers in Israel. A mortgage is the largest financial commitment most households will encounter, but mortgage borrowers today are finding it difficult to understand offers or compare them without deep financial knowledge. The series of reforms that we are advancing is intended to give greater power to customers and make it easier for them to make one of the most significant financial decisions in their lives in a more informed way, and to help households’ economic conduct in the present and the future. These measures are part of a long series of steps that we have advanced in recent years, all of which are intended to help households and small businesses.”
Supervisor of Banks Yair Avidan said, “Buying a home is a household’s most important economic transaction. In order to simplify the process of obtaining a mortgage to finance the purchase and to enable customers to rapidly reach agreement with the bank that offers the best value for them, we have taken a number of significant steps to increase competition between the banks and to help customers in the process of making an implementing their decisions. These measures will encourage customers to survey the market before obtaining a mortgages, since it will now be easier to compare various offers. They will also increase customers’ control of the mortgage terms, including their ability to meet their commitments. I call on the public to use the tools we have provided and to compare the offers of different banks, which will lead to an improvement in mortgage terms.”
A mortgage is the largest financial commitment in the lives of most households. Taking out a mortgage is a complex financial event for households due to the size of the commitment and the complexity of the loan. Mortgages in Israel are split between various tracks, including fixed rate unindexed, fixed rate indexed, variable rate unindexed, and prime indexed. These tracks differ in the anchor to which the mortgage is indexed and in the frequency at which the rate changes.
An international comparison shows that in most countries, mortgages are divided into just two main tracks: fixed rate and variable rate. It also shows that, as opposed to other countries where tracks are not generally combined, mortgages in Israel are generally composed of a mix of a number of tracks, which enables greater flexibility in adjusting the mortgage to the customer’s needs, but also adds to its complexity.
The great complexity in the Israeli mortgage market makes it difficult for borrowers to compare offers from different banks. This complexity increases when the offers include various tracks given for different periods. The series of proposed measures will make it easier for borrowers to assess the significance of the indexations and expected changes, and will help them better understand the risks inherent in the various tracks. In addition to the measures intended to improve information transparency for customers and their ability to compare offers, measures will be advanced that are expected to shorten the duration from the time a request is submitted until an offer is received, and to lead to receiving offers simply and online.
In order to formulate the measures, the Governor of the Bank of Israel established a special interdepartmental working team. As part of its work, the team consulted with a series of world-renowned experts in the areas of mortgages and behavioral economics, officials from the Competition Authority, and more. In addition, in order to optimize the measures, the Bank used focus groups that were comprised of people from a wide variety of backgrounds. At the end of the process, the Bank formulated a number of measures covering three aspects of mortgages: information transparency for the customer and the ability to compare offers; simplicity and the ability to understand the information; and efficiency in the process of taking out a mortgage. The measures that were selected balance the expected contribution to increased transparency and competition in the market with ease of implementation. The following are the main points of the measures:
1. Initial approval in a uniform structure: The initial approval will be identical among all the banks, and will provide uniform, clear, and comprehensive information. The items that will be presented in the initial approval include: the forecast total interest rate; the total forecast payment; and the highest expected monthly payment. An example of an initial approval is attached to this announcement (in Hebrew). This information will increase the level of transparency in a mortgage transaction, and will help the borrower better understand the liabilities inherent in the various offers he receives. It is important to emphasize that the information will be based on uniform calculation methodologies and will be made accessible in an identical manner by all the banks in order to empower the borrower when surveying the market and comparing offers between the various banks.
2. Uniform mortgage baskets at all banks: With the aim of making it easier for mortgage borrowers to compare offers of different banks, a bank that decides to offer a customer a mortgage will provide, in the initial approval, three uniform baskets with a composition determined by the Bank of Israel, in addition to the mortgage basket the bank itself offers, with the duration of the loan being chosen by the customer. The following are the compositions of the three uniform baskets:
a. 100% fixed unindexed.
b. 1/3 fixed unindexed, 1/3 variable indexed, and 1/3 indexed to the prime rate
c. ½ fixed unindexed, ½ indexed to the prime rate.
3. Presenting the expected total interest rate and the expected total payment: Currently, in most cases, mortgage loans are comprised of a number of tracks. Each track has a different interest rate, a different indexation mechanism, and a different repayment period. The difference is not just between the various tracks in the same offer, but also between offers from various banks. Therefore, the interest rates presented in the initial approvals can frequently not be compared. In order for it to be possible to compare the various baskets and offers of different banks, each of the baskets in the initial approval will present the forecast total interest rate and the forecast total payment for the entire mortgage period.
This information takes into account the fees and monthly payments expected throughout the life of the mortgage, based on capital market forecasts of changes in the CPI and interest rates in the economy, which are updated to the date on which the initial approval is granted.
These forecasts are derived from the prices of government bonds, and reflect the assessments of capital market participants regarding the future development of interest rates and inflation. It is important to emphasize that all the banks will base their offers on the same capital market forecasts, which will be published by the Bank of Israel, so that the basis for comparison of the various offers by the banks will be uniform.
4. The amount of the highest expected monthly payment according to the forecasts: This figure will be shown in order to serve as an indicator of changes that may take place in the level of monthly payments, and will be based on capital market forecasts of changes in the CPI and interest rates, which are updated to the date the initial approval is granted.
5. Shortening the time until the initial approval is granted: Currently the time that passes between the submission of the mortgage request and receipt of the initial approval could be as long as two weeks or more. This makes it difficult for borrowers to compare offers from different banks. It is therefore proposed that the time from submitted a request until receipt of the initial approval be limited to just a few days.
6. Submitted the request and receiving an initial approval online: Customers of all banks will be able to submit a mortgage request and receive an initial approval online.
7. Additional information that will be made accessible on the bank’s website and on the customer’s personal page on the lending bank’s website:
7.1 Simulation calculator for mortgage loans, information on all existing types of mortgage loans, details, and more.
7.2 Information to examine the feasibility of refinancing a mortgage loan: When examining the feasibility of refinancing a mortgage, it is not enough to compare the interest paid on the existing mortgage with the interest offered by the refinancing bank. We must also take other considerations into account, such as the early repayment fee and the time remaining until the next update of the interest rate on some tracks. Therefore, the bank will have to provide the borrower interested in refinancing a mortgage with the forecast interest rate on the remaining payments, taking into account the actual amount that the borrower will need to repay (including the early repayment fee and other fees that may exist). This interest rate is comparable to the interest rate offered by a refinancing bank, and will help the customer make an informed decision. In addition, the bank where the active mortgage is being managed will have to present the borrower with the next date on which the interest rate is expected to change.