Prime Rate Mortgages Surge to 23% of Loans in September

Mortgages linked to Israel's prime lending rate saw a significant comeback in September, accounting for 23% of all housing loans, according to Bank of Israel data. This marks the highest proportion since April 2023, with approximately 2 billion shekels ($540 million) taken out under this option. This surge reflects a shift in borrower preferences, driven by recent interest rate cuts. In January, prime-linked mortgages represented only 11.1% of the market, and a year prior, in September 2023, it was just 9%. The prime rate's share has been steadily increasing, reaching 21% in August before its latest jump, largely at the expense of variable, non-indexed rate loans.

Despite this recovery, prime rate mortgages remain below their peak of 39% in September 2022, before the series of interest rate hikes. Meanwhile, borrowers continue to avoid inflation-indexed loans, which hit a more than five-year low in September. These loans totaled only about 790 million shekels, or 9.1% of housing loans, down from 14.1% a year earlier. This avoidance persists even as inflation moderates within the Bank of Israel's target range, likely due to the negative experience of rising principal amounts during periods of high inflation.

Overall, 8.67 billion shekels ($2.34 billion) in housing loans were issued in September, a 20.5% monthly decrease from August but a slight 2.1% drop compared to September of the previous year. However, accounting for the holiday season, which concentrated Rosh Hashanah, Yom Kippur, and Sukkot within September this year, the daily lending activity actually increased by about 3% compared to August. Over the first nine months of the year, housing loans totaled 88.3 billion shekels, a 12% increase year-over-year. The third quarter alone saw 31.1 billion shekels in loans, up 8.6% from the same period last year.

This robust mortgage market contrasts with a weaker new home sales market. This disconnect is attributed to the maturation of past deals, often made with low initial down payments under contractor incentive programs, where buyers are now finalizing their mortgages upon construction completion. Balloon loans, which allow for deferred principal repayment, also saw a decline, totaling 1.11 billion shekels in September, the lowest since November 2023. This trend is attributed to central bank restrictions on contractor deals and falling interest rates, reducing the incentive for these loans.