Bank of Israel Cuts Interest Rate, Easing Mortgage Payments Slightly

The Bank of Israel announced a reduction in its benchmark interest rate from 3.5% to 3.25%, consequently lowering the prime lending rate to 4.75%. This move is expected to decrease the monthly mortgage payment for the average Israeli borrower by approximately 73 shekels, or 876 shekels annually. This calculation, based on Bank of Israel data and reported by Calcalist, applies to an average mortgage of 1.1 million shekels with a 45% prime-linked component.

This marks the sixth interest rate cut since 2023, when the prime rate stood at 6.25%. Cumulatively, these reductions have lowered monthly payments by over 400 shekels per month since the peak. However, many mortgage holders have restructured their loans since 2023 to reduce monthly payments, meaning the impact of the current rate cut will vary among borrowers.

The period of rising interest rates between April 2022 and May 2023, driven by global inflation and energy price surges, ended a prolonged era of near-zero interest rates. Even with the current rate at 3.25%, monthly mortgage repayments remain about 800 shekels higher than they were in early 2022 when rates were near zero. A significant easing of mortgage burdens is still some way off.

The current rate reduction most benefits those with mortgages heavily exposed to the prime rate, particularly those who took out loans before 2022 and have not refinanced. Data indicates a shift in mortgage composition, with borrowers increasingly favoring variable, non-indexed rates, anticipating further rate decreases, while reducing exposure to index-linked loans. New borrowers who have opted for lower prime exposure, averaging around 10% in the past year, will experience a more modest reduction in payments.

Additionally, the lower interest rates are diminishing the appeal of balloon loans, where a substantial portion of the principal is repaid at the end of the loan term. The outstanding balance of these loans has seen a slight increase, reaching 29.2 billion shekels in July 2026, suggesting borrowers are deferring payments.