Israelis Favor Prime Rate Mortgages Amid Falling Interest Rates

Mortgage lending in Israel reached NIS 10.9 billion in August, continuing a trend of high borrowing that has seen over NIS 43 billion taken out in the past four months. Year-to-date, mortgage lending stands at approximately NIS 79.6 billion, a nearly 14% increase compared to the same period last year. This surge occurs despite a relatively moderate housing market with ample new inventory and recent price declines.

A notable shift in mortgage composition is underway, with borrowers increasingly opting for prime rate-linked loans and reducing their exposure to index-linked options. This change is driven by a decrease in the Bank of Israel's benchmark interest rate from 4% to 3.25% since the beginning of the year, consequently lowering the prime rate to 4.75%. Borrowers with prime-linked portions of their mortgages are already benefiting from reduced monthly payments without needing to refinance.

For instance, a NIS 400,000 loan at the prime rate over 25 years could see monthly savings of NIS 150-170 due to a 0.75 percentage point rate drop. For a larger prime portion of NIS 700,000, savings could approach NIS 300 per month. Borrowers with variable-rate mortgages are also seeing benefits as their rates adjust downwards at predetermined intervals, making them more willing to accept interest rate risk.

The share of prime rate mortgages rose to about 24% in August, up from around 22% in July and 20-21% in June, indicating a sustained trend. Conversely, index-linked mortgage borrowing has decreased, falling below 10% of the total in August. Despite inflation falling to around 1.5%, borrowers are actively reducing their exposure to index-linked loans, preferring fixed principal amounts over those that increase with inflation.

The average interest rate for non-index-linked mortgages has also fallen, from around 4.89% in April to approximately 4.56% in July, with the overall weighted average rate at about 4.38% in August. This environment also prompts a re-evaluation of refinancing existing mortgages, especially for loans taken at peak rates in 2023-2024, as lower rates can translate into significant savings over the loan's life, particularly for larger loans with longer remaining terms.