Bank of Israel Rate Cut Spurs Mortgage Refinancing Debate Based on Loan Year

The Bank of Israel reduced its interest rate to 3.5% in early July 2026, marking the third cut this year and the second consecutive quarter-point reduction. This move lowered the average interest rate on non-indexed mortgages to 4.74%, down from 5.11% in June 2025. However, whether refinancing a mortgage is beneficial depends heavily on the year the loan was taken.

Data from the Bank of Israel's banking supervision for June shows that borrowers with 20 to 25 years remaining on non-indexed mortgages currently pay an average rate of 4.81%, and those with over 25 years pay 4.92%. Mortgages signed in 2023 have rates around 5.05%, about a quarter percent higher than current rates, suggesting refinancing could save money. Conversely, borrowers from 2021 and earlier have significantly lower rates, around 3.31% to 3.40%, making refinancing unlikely to reduce costs.

Israeli mortgages 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. Since the prime portion adjusts with interest rate changes and can be refinanced at low cost, the fixed-rate portion is the main factor in refinancing penalties.

The key obstacle to refinancing is the early repayment fee, known as the "discount fee," calculated to offset most of the gains from lower interest rates. This fee is based on the difference between the remaining payments discounted at the original contract rate versus the current average rate. However, reductions apply based on loan age, with a 20% discount after three years and 30% after five, plus a cap on the fee. Flexible-rate components often avoid this fee entirely, and negotiation can sometimes reduce costs further.

A mortgage refinancing calculator from Bizportal requires only the monthly payment and loan origination year to estimate potential savings and penalties. Borrowers flagged as having real potential savings are advised to request a detailed penalty calculation from their bank, which is legally required to provide it before and after refinancing. This transparency is essential for effective negotiation and decision-making.

The next Bank of Israel interest rate decision is scheduled for August 31, 2026, which may further influence refinancing considerations.