Israelis Take Out Larger Mortgages Amid Falling Interest Rates

Israelis are increasingly taking out substantial housing loans, with approximately 10.9 billion shekels in mortgages issued in August alone. This brings the total for July and August to around 22.5 billion shekels, a significant figure given the current moderate pace of the housing market and a high inventory of unsold new homes. A portion of this high mortgage volume can be attributed to payment deferrals, where the actual disbursement of the loan occurs months after the initial contract signing, even if the housing market shows slower sales.

For free market homebuyers, the average mortgage taken out was approximately 1.09 million shekels. Investors secured even larger average loans at about 1.28 million shekels, while those purchasing subsidized housing took out smaller loans averaging around 680,000 shekels. However, the overall average mortgage across all market segments saw a slight decrease in August to about 1.06 million shekels, down from 1.12 million in July, indicating that while free market mortgages remain large, the overall average loan size has not grown in the past month.

These trends coincide with changes in interest rates. The Bank of Israel lowered its benchmark interest rate to 3.25% in early September, with the prime lending rate dropping to 4.75%. While these September rate cuts do not explain the August mortgage figures, previous reductions have already impacted prime-rate loan repayments. The current lower rates are expected to influence future borrowing decisions, and the prime rate track has seen increased usage in new mortgages due to its variable nature, which benefits borrowers when rates fall.

For instance, a family with 400,000 shekels outstanding on a prime rate loan could see an annual interest cost reduction of roughly 1,000 shekels for every 0.25 percentage point drop in the prime rate, though actual monthly payment savings depend on the loan's remaining term and principal repayment speed. The impact of rate changes is amplified for larger prime rate balances.

Household repayment capacity is also supported by nominal wage growth, which increased by 6.2% in the second quarter compared to the previous year, outpacing the 1.5% annual inflation rate in July. While these are economy-wide figures, they suggest improved earning potential for many.

Despite the overall increase in mortgage activity, mortgage defaults have shown improvement, decreasing from approximately 4.45 billion shekels in May to about 4.1 billion in August, a drop of nearly 8%. This reduction, however, still leaves default levels significantly higher than pre-war figures, when outstanding defaults were around 2.7 billion shekels. The recent decline may be due to lower interest rates, payment arrangements, or loan modifications, but it does not signify a complete recovery for all struggling borrowers.

The falling interest rates are also prompting more homeowners to consider mortgage refinancing. In August, the rate of mortgage refinances, including those involving switching banks, rose to 7.7% from 7%. Borrowers are evaluating potential savings against refinancing fees and the terms of their existing loans.