Bank mortgage rates down even without BoI cut

The Bank of Israel has still not cut its interest rate, but people taking out new mortgage loans and those with existing variable rate mortgages are happy to find that interest rates at the banks are already falling. According to Bank of Israel data, the average rate of mortgage interest in July 2025 was 5.28%, which compares with 5.44% in June and 5.95% in July 2024.

The main reason for the fall in interest rates is the expectation priced into yields on government bonds of a decline in the Bank of Israel’s rate in the medium to long term. The banks are coming into line.

The change is mainly in the yield curve for 10-year bonds and longer. When long-term bond yields fall, this signals expectation of a fall in interest rates in the future, which translates into lower financing costs for the banks.

Since the peak in 10-year government bond yields in mid-September 2024, when they stood at 5%, yields have fallen by 87 basis points to 4.13% today. The 2-year yield is also at a low not seen since August 2022, before the Swords of Iron war, at around 3.5%.

As far as the banks are concerned, this means that their cost of capital is lower, and they can pass part of the decline on to mortgage borrowers.

Nofar Jacob, a mortgage consultant and chairperson of the Israel Mortgage Advisors Association, says that the decline in Israel’s risk premium was boosted by the Rising Lion campaign against Iran “which put downward pressure on government bond yields.”

“The euphoria following the operation did dissipate at a certain stage, but it greatly impacted the Bank of Israel’s forecasts of moderation in the inflation rate, which in the end turned into market expectations of lower interest rates,” she adds.

Jacob stresses that the main change is in the mix of types of loans taken by mortgage borrowers. “In 2022, about 40% of the mortgage mix was the variable prime-rate component; today, it amounts to just 10%. By contrast, the variable rate component linked to bond rates has risen substantially, to 40% of the mix.”

Minor change so far

The actual fall in interest rates is not dramatic, “but there’s no doubt that if we look at all the data, including imminent interest rate cuts in the US, we are entering a lower interest rate environment,” says Jacob. At the moment, a 0.1% change in the interest rate on non-linked fixed-rate loans translates into a reduction of about NIS 30 in the monthly repayment on a loan of NIS 500,000, or a saving of less than NIS 5,000 over 25 years.

Nevertheless, it seems that the banks, which finance both the developers and the homebuyers, realize that they have to pump some oxygen into the slowing real estate market. Unless they take care of financing the demand, they are liable to find themselves in trouble on the supply side.

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So, besides the change in the monetary environment and the expectations of lower interest rates, the banks have a clear interest in making mortgage loans cheaper, both to restore demand for housing credit, which is an important source of revenue, and to relieve the pressure from the large stock of unsold apartments, and thus reduce credit risk in the real estate sector.

Criticism from above is also a factor. The Bank of Israel Banking Supervision Department, and politicians, have expressed criticism of the banks recently for the huge profits they have reaped in the period of high interest rates. The banks want to be seen to be playing their part, and are lowering interest rates, perhaps in order to improve their image.

In addition, as the market changes direction, competition between the banks is on the rise, which helps borrowers. Bank Leumi, which in recent months has seen Mizrahi Tefahot Bank again outstripping it in market share in mortgages, has announced a reduction in its prime lending rate by 0.25% to 5.75%, which of course forces its competitors to court customers as well.

Published by Globes, Israel business news – en.globes.co.il – on September 8, 2025.

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