Israeli Borrowers Shift to Prime Rate Mortgages Amid Interest Rate Uncertainty

Israeli mortgage borrowers are increasingly choosing prime rate loans, with the share of prime-linked mortgages nearly doubling to about 21% of new loans in June 2026 compared to 11% a year earlier. This shift reflects public expectations of continued interest rate cuts by the Bank of Israel, which has lowered its key rate three times since the start of 2026 to 3.5%. The prime rate, derived from the Bank of Israel rate plus 1.5%, currently stands at 5%, with some borrowers paying as low as 4.1% after discounts.

The appeal of prime rate mortgages lies in their sensitivity to monetary policy decisions, allowing borrowers to benefit from rate reductions. For example, a 0.25% rate cut reduces monthly payments by approximately 140 shekels on a one million shekel loan over 25 years. However, if rate cuts are delayed or reversed, borrowers face higher repayments, with a 1% increase potentially adding over 570 shekels monthly and 171,000 shekels in interest over the loan term.

Despite local rate cuts, global financial conditions have shifted. Long-term bond yields in the US and Europe are rising, with the US 30-year government bond yield hitting 5.216%, the highest since 2001, reflecting expectations of possible rate hikes abroad. This global trend indirectly affects Israeli mortgage rates, especially fixed-rate loans, as banks’ borrowing costs rise.

Bank of Israel regulations limit prime rate loans to two-thirds of the mortgage amount, requiring at least one-third in fixed-rate loans. The average fixed shekel rate for loans over 20 years is around 4.8-4.9%, while fixed loans linked to the consumer price index offer lower nominal rates but carry inflation risk. Borrowers switching to prime rate loans exchange inflation risk for interest rate risk tied to the central bank’s decisions.

Refinancing or adjusting mortgage compositions involves costs and depends on individual circumstances such as remaining loan term and income flexibility. The next Bank of Israel interest rate decision is scheduled for September 1, with each 0.25% rate change affecting monthly payments by roughly 140 shekels per million shekels borrowed on prime terms.