Bank of Israel Rate Cut Sparks Mixed Mortgage Refinancing Prospects Based on Loan Year

The Bank of Israel recently lowered its interest rate to 3.5%, marking the third cut this year and the second consecutive reduction in July. This move brought the average interest rate on non-indexed mortgages down to 4.74%, prompting renewed interest in mortgage refinancing. However, whether refinancing is beneficial depends heavily on the year the mortgage was taken.

Data from the Bank of Israel's banking supervision for June shows that borrowers with non-indexed mortgages signed in 2023 face an average rate of about 5.05%, slightly higher than the current market rate, suggesting refinancing could save money. Conversely, those who took out mortgages in 2021 or earlier enjoy significantly lower rates around 3.3%, making refinancing unlikely to reduce costs. Borrowers from early 2022 also generally have below-average rates.

Mortgage structures in Israel typically include a mix of fixed and prime-linked interest components, with at least one-third fixed and up to two-thirds linked to the prime rate. The prime-linked portion adjusts with rate changes and can be refinanced with minimal cost, while the fixed portion carries early repayment penalties, known as the "discount fee." This fee is calculated to nearly offset any gains from refinancing, but reductions apply based on loan age, a statutory cap, and the flexible nature of some loan components.

Additional minor fees, such as a 0.1% penalty for late notification of repayment and a small operational fee, can also affect refinancing costs. A mortgage calculator from Bizportal helps borrowers estimate refinancing benefits using just their monthly payment and loan year, with options to input more detailed data for accuracy.

Borrowers identified as having potential savings are advised to request a detailed penalty calculation from their bank, which is legally required to provide this information before and after refinancing. This transparency is essential for negotiating better terms with competing lenders. The next Bank of Israel interest rate decision is scheduled for August 31.

Summary: The Bank of Israel's recent rate cut lowers mortgage costs but refinancing benefits depend on when the mortgage was taken, with 2023 borrowers likely to save and 2021 or earlier borrowers unlikely to benefit due to penalties and existing low rates.