The supervision of banks at the Bank of Israel published last week a draft circular intended to regulate the field of reverse mortgages in banks. A reverse mortgage is a mortgage taken by elderly borrowers, aged 60 and over, on an existing property. The mortgage is returned after the death of the borrowers, when their house actually serves as the source of the repayment of the mortgage.
In the draft circular, the Bank of Israel states that its reverse mortgage will be non-recourse – that is, without the borrowers’ right of return. Meaning: If the bank gave a high mortgage and the value of the property decreased, the bank will take over the property, but will not collect the difference from the heirs of the property. This situation is unusual, since the mortgages in Israel are mortgages with a full return to the borrower, so if the house after its realization is not enough to pay off the loan, the bank can be repaid from other assets of the borrower.
According to the draft, a reverse mortgage can be obtained for a maximum of 50% of the property’s value, with a projected financing rate of no more than 60%. That is, if the loan is taken and the interest is also deferred and not paid continuously, the weighting of the projected interest (according to the expected life expectancy of the youngest borrower) will be added to the amount of the loan to determine the financing rate.
The repayment of the loan will be done through the realization of the property, after the death of the last borrower, when with the last borrower leaving the property, the heirs will be able to request up to 12 months of postponement of the repayment of the loan, in order to raise money to pay it off, not through the sale of the property.
The draft stipulates that the banks will refrain from proactive marketing of the reverse mortgages, and must adapt the sales procedure of the reverse mortgages to an older population.
Banks can provide a reverse mortgage in a variety of interest rates, as a lump sum or as an annuity. Originally, the reverse mortgage was intended to help with current living for adults who have property, but do not have a current pension to live on. In recent years, her mortgage has changed its purpose, and it is mainly used to liquidate the inheritance, and to take out a loan that will be used as equity for the purchase of another apartment, for the children.
Today, only Mizrahi Tefahot Bank operates in the field of reverse mortgages, when in 2021, all the insurance companies entered the field one by one, granting these mortgages on a course of index-linked interest. Additional banks have already announced their intention to enter the field, and they will be the main competition for the insurance companies.
Yonatan Berliner, chairman of the professional committee at the Association of Mortgage Consultants, states in relation to the draft circular that: “Today, all insurance companies realize their reverse mortgages at an expensive interest rate, on a track linked to the index – a combination that guarantees a high cost and a debt that has been greatly cultivated over the years. The unique mechanism, which the Bank of Israel is using for the first time, will bring a lesson that the banks that choose to give a reverse mortgage will be ‘forced’ to do so precisely in the prime route (instead of in the KT route like the insurance companies), which is more volatile, but will ensure that the loan principal will not increase over the years, and the family will be able know in advance what the amount of the debt is that it leaves to the heirs. In addition, this is the first time that the Bank of Israel determines a special capital allocation for a product, regardless of the purpose of the loan. This is a very interesting step on the part of the Bank of Israel, which actually gives the banks a pricing advantage over the insurance companies, and ensures that the banks can to compete with the interest rates that exist in the market relatively easily. The existing players will now have tough competition from the big banks, it is not certain that all of them will survive, but the senior citizens will benefit.”