Bank of Israel Rate Cuts Lower Mortgage Payments, Fueling Demand

The Bank of Israel has implemented a significant, gradual reduction in its benchmark interest rate over the past year, marking a departure from smaller, incremental decreases. Governor Amir Yaron's monetary committee anticipates further rate cuts. The committee's recent decision also considered the housing market, noting a stable inventory of unsold homes and a moderate increase in transactions in May and June, particularly for new apartments. Additionally, the central bank has observed a stabilization in rent price increases.

The primary question arising from these rate reductions concerns their impact on mortgage payments. For a NIS 450,000 mortgage over 25 years, the cumulative effect of two previous rate cuts resulted in a NIS 129 monthly decrease. A NIS 1 million mortgage saw a reduction of nearly NIS 300. The most recent rate cut alone is estimated to lower monthly payments by NIS 65 for a NIS 450,000 mortgage, and double that for a NIS 900,000 loan.

Data from mortgage consultants reveals that since November 2023, when the prime rate fell from 6% to 4.75%, a NIS 450,000 mortgage over 25 years has decreased by NIS 334 monthly. For a NIS 900,000 loan, the savings are over double that amount, reaching hundreds of shekels. Larger mortgages, such as NIS 1.35 million over 30 years, have seen monthly savings exceeding NIS 1,000.

The Bank of Israel noted a 0.1% rise in apartment prices in May-June, with a 1.5% decrease over the past year. Mortgage approvals in July reached approximately NIS 10 billion. The annual increase in the housing component of the consumer price index slowed to 3.9% in July, with stabilized price increases in renewed contracts at 2.6%. Annual rent increases also slowed to 4.7% in July from 6.6% in June, indicating a halt in rent price hikes.

Experts suggest that falling interest rates increase demand for housing due to lower expected mortgage repayments. The Association of Mortgage Consultants observes a public shift back towards prime-rate mortgage tracks, despite the interest rate remaining unchanged. They advise borrowers to re-evaluate their mortgage structures and monthly payments in this environment. While further rate cuts are expected, they caution that the era of extremely low interest rates is unlikely to return, noting the rapid increase from 0.1% to 4.75% in about 13 months. The association also highlights a growing trend of borrowers choosing index-linked tracks, which have increased from 10% to over 20% of the market, urging careful consideration of each track's risks.