The Bank of Israel’s recent mortgage restrictions have shaken up the real estate and financing landscape, targeting contractor loans and deferred payment models. While many predicted a sharp slowdown, the market is proving more resilient than expected. Developers, banks, and buyers are already adapting with new strategies, signaling that these changes may lead to an evolution rather than a revolution in how deals are structured.

By Aaron Krasner

About a month ago, the Bank of Israel rolled out new mortgage restrictions that shook up the real estate and mortgage market, focusing mainly on two areas:

• Limiting contractor loans (“halva’ot kablan“) to no more than 10% of a bank’s total quarterly residential mortgage volume.
  
• Imposing stricter requirements on “20%-80%” payment plans, where the buyer defers 80% of the payment until receiving keys.

Upon hearing the news, many predicted a significant slowdown. Some even talked about a near “freezing” of sales activity, especially in projects outside the big cities where flexible payment models have become critical for moving inventory.

So with Pesach behind us and the summer season ahead, now is the perfect time to pause and ask: What’s really happening on the ground?

A Quick Recap: Why These Changes Matter

Contractor loans and deferred payment models have been essential for developers in reigniting demand after the 2023 slowdown, by allowing buyers to pay only a minimal cash deposit. But from the regulator’s view, these strategies have been storing up real risks. Buyers were being approved for purchases without having a clear mortgage in place, leading the Bank of Israel to worry how many deals would falter when the final payments came due.

The latest intervention of new mortgage restrictions was designed to cool this trend without completely derailing the market. Instead of banning these models outright, they have tried to make them less attractive and more expensive — for banks, developers, and ultimately, buyers.

So, Three Weeks Later — What Are We Seeing?

Sadly, it’s just too early to tell, as we’re still very early in the adjustment period. With the natural market slowdown around Pesach and less than a full month since the changes took effect, it’s too soon to draw firm conclusions about long-term trends.

That said, we can already notice a few things:

‘Slow Down’ Or ‘Don’t Speed Up’? – The Bank of Israel’s latest mortgage restrictions aren’t about slowing down contractor loans, but about preventing their unchecked growth. By imposing a 10% limit which the banks weren’t exceeding anyway, the message is clear: the current level is acceptable, but it shouldn’t become the primary financing method. The goal is to contain this trend before it escalates into a greater risk for the market. In this sense, the regulation is less about changing the status quo and more about ensuring things don’t worsen.

Developers Adjusting Strategies – While the new mortgage restrictions may have put a cap on certain financing options, developers are proving there are always other ways to stimulate demand. As expected, they haven’t folded their arms and accepted the new reality, instead they’re adapting quickly with creative solutions. We’re seeing new financing models emerge, such as partial payment plans that defer 40%-60% of the purchase price instead of the previous 80%. Some are requesting “early underwriting” where buyers secure mortgage approvals at the time of signing, rather than waiting until funds are needed- in order to reduce the risk of default. Others are shifting strategies entirely, offering straightforward price discounts instead of relying on complex financing promotions.
 
The Rise Of Non-Bank Financing? – Whilst it’s still far too early to tell what the full impact of these new regulations will be, there’s a possibility that non-bank financing could see a significant rise. While their offerings, such as bridge loans and flexible terms, tend to be more expensive, they are less regulated, providing greater flexibility than banks can offer. While non-bank lending still represents a small slice of the market, its share is gradually growing. This is especially true among investors and buyers seeking pre-sale opportunities, who are looking for financing solutions that can accommodate their specific needs outside of the typical bank offerings.

The Big Picture: Evolution Not Revolution

As with its other interventions in the housing market, the Bank of Israel’s strategy will likely work as intended. We’ll see a cooling-off and a recalibration with no dramatic change in the overall picture. Riskier practices are being dialed back, and both banks and developers are shifting toward more sustainable structures.

But given the market’s existing affordability challenges, supply shortages, and high interest rates, even a slight tightening can have a larger-than-expected impact. The next few months will be critical. Will flexible alternatives fully replace the old 20-80 model? Will non-bank lending surge or remain niche? And of course, the burning question on everyone’s mind, will this intervention finally bring prices down?

One thing is certain: 2025 won’t be a copy-paste of 2024. A shift in deal structures is already happening, and as always, those who adapt fast will come out on top.