Bank of Israel Cuts Interest Rate to 3.5%, Offering Modest Mortgage Savings

On July 6, 2026, the Bank of Israel lowered its key interest rate by 0.25%, bringing it down to 3.5%, and consequently reduced the prime rate to 5% (the prime rate is the Bank of Israel rate plus a fixed 1.5%). This decision follows a slowdown in inflation and a strengthening shekel, allowing the monetary committee to ease credit conditions. Economists expect further rate cuts, which could continue to reduce prime rates and household financing costs.

However, the immediate impact on mortgage repayments is limited. Israeli mortgages typically consist of multiple components, each responding differently to rate changes. The prime-linked portion of a mortgage adjusts instantly and automatically with the Bank of Israel’s rate, reducing monthly payments immediately. Fixed-rate components remain unchanged for the loan’s duration, unaffected by the rate cut. Variable-rate components adjust only partially and at their next scheduled update, which can be years away.

For an average household paying about 6,000 shekels monthly on their mortgage, the immediate monthly saving from the prime-linked portion is approximately 50 shekels. Once variable-rate components update, total monthly savings could reach 70 to 80 shekels. Although modest on a monthly basis, these savings accumulate to thousands of shekels over the mortgage term. Borrowers with a larger prime-rate share in their mortgage will experience quicker relief. Prospective mortgage applicants can factor in the declining interest environment when choosing their loan mix, and existing borrowers can calculate their specific savings based on their current repayment, remaining years, and mortgage composition.