Getting a mortgage in a changing reality - comment

After two years of the housing loan and mortgage industry being on a high, which made purchasing a residential apartment possible, the banks are now experiencing a significant decrease in mortgage borrowing, which dropped from NIS 13.4 billion in March of last year to NIS 4.6b. in April.

The low number of new mortgages, even though that figure is from a month in which there were a lot of holiday days and less banking activity, is the lowest recorded in the banking system in the last three and a half years.

The demand for mortgages is decreasing as a direct link to the slowdown in the housing market due to the high apartment prices, the sharp rise in interest rates and the significant increase in monthly mortgage payments.

What has changed in Israel's mortgage sector?

The low level of mortgage activity compared to previous years has not been the only noticeable change in the mortgage sector recently. Alongside the decrease in banks’ traditional activity of providing loans in order to buy an apartment, we can see a growing demand for loans for other purposes and changes in the repayment plans that were typical of loans until recently.

Many borrowers and the mortgage advisers accompanying them, who are reducing their applications for loans for the purpose of purchasing apartments that are from a contractor, “Mehir La’Mishtaken” (Buyer Fixed Plan), second-hand or self-build, are specifically focusing now on recycling loans taken out in recent years with an emphasis on spreading out an existing long-term loan or converting prime interest payment plans that have become more expensive to plans that enable a lower and more stable monthly repayment even in a high-interest environment. Loan recycling is done at the bank where the loan was originally taken or at competing banks.

Often, customers choose to split the loan between several banks and recycle the loan payment plan, which has become more expensive, at a competing bank, which then provides improved loan terms, and the remainder of the loan is left with the bank where the original loan was made at a low-interest rate.

Other loans that are now gaining great popularity are loans for the purpose of liquidating short-term loans taken for various purposes at commercial banks and other credit sources and recycling them through one long-term loan.

Borrowers can combine car loans, credit card loans, workplace loans, etc. Short-term loans, which were mostly taken out through the prime interest rate plan, became very expensive with the increase in interest rates, and the way to deal with them is to pay them off by increasing the mortgage on the apartment and spreading all the loans through one large long-term loan with a relatively low monthly repayment.

Another notable change in regards to the choice of loan repayment plans by borrowers: The prime rate plan, which was preferred by all borrowers and advisers and reached about two-thirds of loans because it was the cheapest, is now the most expensive route and the demand for it is low and in many cases is not included in a loan combination. The index-linked plans also became less attractive due to the high inflation.

Rather, payment plans of fixed interest rates that are not indexed and change every five years without erosion, in which the interest rate is almost 2% higher than their rate a year and two years ago, are now the first priority for loans.

All those involved in the field of mortgages these days are experiencing transformations and changes. The banks are reporting a considerable increase in the banking risk ratios related to the rate of financing from pledged properties and the ratio of the monthly repayment of the loan to the income of the borrowers.

The increase in interest rates has an impact on the ability of customers to get approved for a loan. The increased monthly repayment constitutes a larger part of one’s income and sometimes causes that there will be an exception to the maximum repayment ratio leading to the rejection of the application.

Apartment buyers, borrowers, mortgage consulting companies and banks are learning the new reality and adjusting the demand levels, the requested loan amounts, the payment plans and the related products, and this is in order to properly deal with a different and challenging market situation that is not yet clear when it will end and how.

The writer is the assistant CEO and head of the mortgage department at Mercantile Bank.