Fourth Consecutive Interest Rate Cut Lowers Mortgage Costs by Over 100,000 Shekels

The Bank of Israel's fourth consecutive interest rate reduction, by 0.25%, will take effect this Thursday, lowering the prime rate to 5%. This move offers relief to borrowers amid a mortgage portfolio totaling approximately 630 billion shekels. For an average mortgage of about one million shekels with a 45% prime component, monthly payments will decrease by 66 shekels, equating to an annual saving of 792 shekels. Since the peak interest rate of 4.75% nearly three years ago, monthly mortgage payments have dropped by 338 shekels, or 4,056 shekels annually.

Over the typical 25-year mortgage term, total repayments, which had surged from 1.43 million to around 1.79 million shekels due to prior rate hikes, have now fallen by roughly 105,000 shekels. However, this relief only partially offsets the sharp mortgage cost increases caused by the rapid rise in interest rates from 0.1% to 4.75% within 13 months. Monthly payments remain about 810 shekels higher than for similar mortgages taken at the start of 2022 when rates were near zero.

The timing of this rate cut is significant, coinciding with the traditionally active summer mortgage season. Last July and August saw record mortgage volumes of about 20 billion shekels, though the current real estate market slowdown casts doubt on matching those figures this year. Continued rate cuts, and the possibility of further reductions by year-end, may encourage hesitant buyers.

The immediate benefit to borrowers depends on their exposure to the prime-linked mortgage track. After the Bank of Israel removed a historical one-third cap in December 2020, many borrowers shifted heavily to prime-based loans, peaking at 57.6% in July 2022. Since early 2023, about 132 billion shekels have been refinanced, often moving away from prime to fixed or bond-based rates, which means these borrowers will experience the rate cuts less directly. New borrowers in the past year have limited prime exposure to about 10%, reducing their sensitivity to rate changes.

These rate cuts have effectively ended a controversial proposal by National Economic Council head Avi Simhon for the state to retroactively cover part of mortgage cost increases, estimated to cost 2 billion shekels annually. The Bank of Israel and Finance Ministry strongly opposed this plan, which was shelved after failing to reach the ministerial legislation committee in May. With ongoing rate reductions and the approaching Knesset dissolution, such retroactive relief legislation is now considered unfeasible.