Mortgage Holders Brace for Potential Rate Cuts by Bank of Israel Governor

Mortgage holders are preparing for the possibility of interest rate reductions, with the Bank of Israel reporting that credit volume in the prime rate track reached nearly NIS 2 billion in September. Matania Kordova, CEO of Rechav Finance, stated that the shift to the prime track is not coincidental, as borrowers anticipate further rate decreases and wish to benefit directly from any cuts by the Bank of Israel. He also noted the flexibility of this track, allowing for early repayment or refinancing without penalties related to interest rate differentials.

Kordova illustrated the financial impact with an example of a NIS 1 million mortgage over 25 years, where half is taken at a 5.5% prime rate. The prime component's monthly repayment would be approximately NIS 3,070. A decrease to 4.5% would lower this to about NIS 2,780, and a further drop to 4% would bring it down to approximately NIS 2,640, a monthly difference of over NIS 400. The actual savings depend on when rates change and the remaining loan balance.

However, Kordova cautioned that this strategy carries risks. Borrowers increasing their prime rate component must be prepared for delayed rate cuts or even potential rate increases due to security and inflationary developments. The choice between mortgage tracks also depends on a household's ability to manage fluctuating expenses. Fixed, non-indexed rates offer payment certainty but do not automatically adjust downward with rate cuts.

Kordova also suggested re-evaluating indexed tracks given the moderation in inflation, advising against automatic dismissal due to past experiences with rising index rates. He pointed out that the loan principal in the prime track is not indexed to the inflation rate. He emphasized that assuming rates will only fall is a dangerous assumption for a multi-decade mortgage, especially in uncertain times. Kordova stressed that diversifying mortgage tracks and maintaining flexibility are more crucial than chasing the seemingly cheapest option today, as security events could reignite inflationary pressures and increase prime rates.