Is It Better to Pay Off a Mortgage or Invest 200,000 Shekels in Deposits in Israel's Current Interest Rate Environment

Israeli families with 200,000 shekels in spare cash face a common dilemma: should they use the money to pay down their mortgage or place it in a bank deposit? With the Bank of Israel's interest rate at 3.5% and prime rate at 5%, many mortgages carry interest rates of 5% or higher, making early mortgage repayment potentially more financially beneficial than deposit yields.

Bank deposits currently offer gross returns around 3.5%, which after a 15% tax on interest income, nets just under 3%. In contrast, paying off a mortgage with a 5% interest rate can save about 10,000 shekels annually in interest payments on 200,000 shekels, compared to roughly 5,950 shekels net from deposits, creating a yearly difference of approximately 4,000 shekels favoring mortgage repayment. Over five years, this gap can accumulate to about 23,000 shekels.

However, early mortgage repayment may involve prepayment fees, especially on fixed-rate loans, which can reach thousands of shekels depending on the loan terms and interest rate differentials. Prime-rate linked mortgages typically have lower or no prepayment penalties. Families must weigh these costs against the interest savings.

Alternative investment options like money market funds or government bonds yield returns close to the Bank of Israel rate but are generally less profitable than mortgage repayment unless mortgage rates are significantly lower. Stock market investments historically offer higher returns but come with higher risk and tax implications, making them less predictable compared to the guaranteed savings from mortgage interest avoidance.

Liquidity considerations are also crucial. Paying down a mortgage ties up cash, reducing financial flexibility for emergencies or unexpected expenses. Some families may prefer splitting the funds, using part to reduce high-interest debt and keeping some liquid as an emergency fund.

Ultimately, the decision depends on the actual mortgage interest rate, prepayment fees, tax implications, investment returns, and the family's financial stability and goals. Those paying higher mortgage rates generally benefit more from early repayment, while those with lower rates or older mortgages might find investing or maintaining liquidity preferable.