Mortgage Lending Hits 20-Month High in July Despite Cooling Real Estate Market

In July 2025, mortgage lending in Israel reached approximately 11.5 billion shekels, marking an 8% increase compared to July 2024, according to Bank of Israel data released on Wednesday. This is the highest monthly mortgage volume in 20 months, second only to December 2024's peak of 13.8 billion shekels, recorded just before the VAT hike to 18%. Typically, summer months see elevated mortgage activity, with July-August 2024 reaching a record 20 billion shekels for that period, and July 2025 data suggests this summer's record will be surpassed.

However, this surge contrasts with the stagnation in the real estate market itself. Experts explain that much of the current mortgage volume stems from older real estate transactions, particularly those involving "contractor loans" where buyers pay a down payment upfront and take mortgages only at the end of construction. This trend is expected to decline from 2027 onward, and if housing demand does not increase, the mortgage market is predicted to cool significantly. Mortgage advisors warn that the current high figures are an "optical illusion" that could lead to dangerous complacency, emphasizing the need to distinguish between bank credit volumes and actual housing demand.

The Bank of Israel's July data also reveals shifts in mortgage product preferences. Mortgages linked to the prime interest rate rose to about 2.2 billion shekels, or 19% of total mortgages, up from 9% in July 2024, reflecting a gradual return to prime rate loans following recent interest rate cuts. Conversely, mortgages indexed to the Consumer Price Index (CPI) dropped to just 10% of total mortgages, the lowest in years, despite inflation stabilizing within the Bank of Israel's target range. This decline reflects public wariness after losses during periods of high inflation.

Meanwhile, balloon loans, where borrowers defer principal repayments for several years, decreased to 1.6 billion shekels in July, representing 13.9% of total mortgages, the lowest level since November 2023. These loans had surged in recent years as a financing tool for home improvers and investors, often subsidized by contractors to encourage purchases without officially lowering prices. The Bank of Israel's April 2024 intervention limited such subsidies. Although the data does not specify how many balloon loans remain subsidized, the recent decline likely results from interest rate cuts rather than reduced contractor promotions, which continue to entice buyers.