Israeli Homeowners Weigh Mortgage Refinancing Amid Falling Interest Rates

Israeli homeowners who took out mortgages when interest rates were at their peak are now considering refinancing as rates decline. The Bank of Israel's current interest rate stands at 3.25%, leading to a prime rate of 4.75%. The average interest rate for unlinked shekel mortgages in the past month was 4.58%, with rates reaching 4.74% for 20-25 year terms and 4.85% for terms over 25 years. These figures represent averages of completed transactions, not fixed bank offers.

Refinancing a NIS 1 million mortgage over 20 years from 5.5% to 4.5% could reduce monthly payments by approximately NIS 553, saving about NIS 133,000 over the loan's life, excluding refinancing costs. Similarly, a NIS 1.2 million mortgage over 25 years could see monthly savings of NIS 486 by refinancing from 5.2% to 4.5%, totaling around NIS 146,000. For a mortgage with NIS 800,000 remaining over 12 years, dropping from 5.4% to 4.6% could save NIS 321 monthly, or NIS 46,000 over the remaining term.

However, refinancing involves exit fees and early repayment penalties. If these costs reach NIS 18,000, the monthly savings of NIS 321 would take approximately 56 months to recoup. The decision to refinance also depends on future plans, such as selling the property. Some mortgage tracks, particularly fixed-rate ones, may incur an "erosion fee" due to falling interest rates, calculated using average rates published by the Bank of Israel.

Another consideration is the impact on monthly payments versus total interest paid. Refinancing a NIS 1 million loan over 15 years from 5.5% to 4.5% could lower monthly payments by over NIS 2,600 by extending the term to 25 years. While this offers immediate cash flow relief, the total interest paid over the loan's life could increase by nearly NIS 197,000, from NIS 471,000 to NIS 667,000.

Refinancing can also be used to shorten the loan term. By keeping monthly payments similar, borrowers can leverage lower interest rates to pay off their mortgage years earlier. Alternatively, some may choose to reduce their monthly payments to free up funds for other expenses or to prepare for potential income reductions. The decision hinges on a detailed analysis of refinancing costs, potential savings, and individual financial goals.