In recent years, the Bank of Israel has completed several important reforms in the mortgage sector. Despite this, the public is still filled with quite a bit of confusion and uncertainty when they come to the bank and ask for a mortgage. The latest and comprehensive reform of the Bank of Israel on the subject is intended to increase transparency and bring more order to the subject. Since a mortgage is not just a loan, but a financial product that accompanies the individual or the family for years, it is important to fully understand the meaning of the current reform and what it helps.
Shortening processes and dealing with bureaucracy
A major complaint of mortgage takers in recent years is clumsiness. The Bank of Israel received quite a few complaints about procrastination, already in the mortgage approval process (at the principle approval level). This is partly due to an increase in the scope of mortgages, but also due to a lack of manpower. The Bank of Israel decided to oblige the banks to improve work procedures, assign more personnel as needed, and actually speed up the receipt of the approval in principle.
The meaning: the banks will be obliged from now on to provide you with an approval in principle for a mortgage within 5 business days. This is expected to make it easier for the public to close contracts for the purchase of apartments from contractors or second hand. Speeding up the processes saves money especially in a period when interest rates are rising, the index is rising and the construction input index is rising. The banks are also required to prepare to provide approval in principle for an online mortgage, even without coming to the bank. For those interested, confirmation can still be requested by phone.
Get to know the uniform format
A central part of the reform is designed to make it easier for customers to understand the meaning of the approval in principle. Banks will no longer be able to determine their own version of an approval in principle. The Bank of Israel defined a uniform format. But it is not just a matter of wording. The uniform format defines certain mixes that banks are obliged to offer. The mixes are called uniform “baskets” and there will be three of them in every offer and approval for a mortgage. In addition, each bank will be able to offer an additional basket, customized for the customer. Meaning: customers will have the ability to understand where they stand, while comparing several different offers. The wording and the mixes (mostly) will be identical so that it is easy to contrast one with the other.
What uniform baskets are the banks obliged to offer
According to the new mortgage reform, which in large part began to be implemented throughout 2022 (in a graduated form), these are the defined baskets:
Basket 1: A mortgage based on a single track, which guarantees an unchanged monthly repayment. That is, one hundred percent of the mortgage will be based on a fixed interest rate, without linkage. Note: This is the most solid route, but the interest rate at the beginning of the mortgage will often be higher than the alternatives. The basket protects against future interest rate increases and is not affected by an increase in the index.
Basket 2: A mortgage based on a mix of one-third fixed-rate mortgage (without linkage), one-third prime-linked mortgage, one-third variable-rate mortgage every 5 years (index-linked).
Basket 3: half-half mortgage – half with a fixed interest rate without linkage and half with a prime-linked mortgage.
Transparency in the interest rate and the monthly repayment
The latest reform puts transparency for the customer at the center. As part of increasing transparency, every approval in principle for a mortgage will contain a breakdown of the total mortgage interest. Please note that when it comes to variable and/or linked mortgage interest, the bank is required to provide an estimate and forecast, according to professional calculation. The Bank of Israel defines the manner in which the forecast is carried out, so that here too there is transparency, clarity and uniformity. Also, the mortgage approval will define what the initial mortgage payment is and what the maximum monthly payment is expected to be, based on the banking forecast. Also, the bank will detail to customers total additional costs, in the form of fees associated with the mortgage.
Online tools for customer use
In light of the demand from the public for technological tools, the Bank of Israel intervenes in this as well. The online tools that banks are required to establish have been defined. First, the banks will provide efficient and convenient calculators for pre-mortgage checks. These calculators will allow customers to perform simulations of mixes and periods, themselves. The meaning – the customers can do their homework before a conversation or inquiry with the bank representative.
In addition and in the next phase of the reform, the banks will provide existing customers with transparent and comprehensive information (on the website) on the feasibility of turnover. The meaning: the customer will be able to check how much he can save in changing market conditions, by making a change in the loan. (Note: turnover means replacing an existing mortgage with a new mortgage according to the current market conditions). The viability takes into account the historical interest rate, the current interest rate and the early repayment fee that the customer is expected to pay.