Rising Bank Margins Limit Impact of Bank of Israel Rate Cuts on Mortgages
Despite recent interest rate cuts by the Bank of Israel, mortgage borrowers have not fully benefited due to increasing interest margins charged by banks. Over the past months, banks have raised their spreads on variable-rate mortgages to between 1% and 1.3% above relevant government bond yields, compared to previous margins around 0.7%. This trend has partially offset the central bank's rate reductions, as official data shows mortgage interest rates fell by only 0.37% in the past year, while the Bank of Israel's rate dropped by 1%.
The current Bank of Israel interest rate stands at 3.5%, with the prime rate at 5%, which influences mortgage rates. Although demand for mortgages remains high, exceeding 11 billion shekels in June, many borrowers are only now taking mortgages on deals signed years ago due to financing arrangements delaying mortgage initiation. This strong demand and limited borrower flexibility have empowered banks to widen their margins. Financial advisors note that while the base interest rate is important, the bank's margin over bond yields ultimately determines mortgage costs, and recent data indicates banks are increasing these margins after compressing them during the prior high-rate period.
Mortgage consultant Tomer Veron highlighted that recent offers for variable-rate mortgages show margins above 1%, signaling banks' attempts to recoup some of the interest rate reductions. Industry experts advise borrowers not to assume rate cuts will automatically translate into cheaper mortgages and recommend thorough comparison and negotiation. Paradoxically, those expecting further rate cuts may find a brief window now to secure better mortgage rates before banks raise margins further.
Mortgage advisors' associations emphasize that despite recent margin increases, current spreads remain historically low compared to the zero-interest rate period. They attribute the margin adjustments to changing market conditions and stress their role in fostering competition and fair lending terms. Meanwhile, some experts suggest delaying index-linked mortgage contracts until mid-September due to expected high inflation indices.
In summary, while the Bank of Israel has lowered rates, banks' rising margins have limited the benefits for mortgage borrowers, creating a complex market environment requiring careful borrower strategy.
