Banks fail to fully pass on rate cuts to mortgage takers

The two interest rate cuts in the past few months by the Bank of Israel totaling 0.5% have been good news for mortgage takers but also for the mortgage banks, which have offset some of the cut to increase profit margins. This is what emerges from dozens of mortgage approvals that were examined by the Darkenu mortgage advisory network.

In November, the Bank of Israel cut its interest rate from 4.5% to 4.25% and this month to 4%. The first cuts since January 2024.

These cuts make it easier for mortgage borrowers, but cumulative data from the last two months reveals that banks are finding ways to maximize profits at the expense of mortgage takers, by increasing margins, that is, the profit that the bank rakes in on the money it lends as a mortgage.

Darkenu gathered dozens of mortgage approvals in principle from various banks over the past six months, which show that the “anchor”, which is the bank’s cost of raising money, fell from 4.21% to 3.8%, but the average margin, which is the bank’s profit from borrowers, rose from 0.57% to 0.78%.

The meaning for the borrower is that while the market cut the cost of money for the bank, the bank decided to increase the profit margin for the customer by 37%.

Consequently the interest rate cut does not reach the customer who is currently trying to take out a mortgage.

Darkenu mortgage advisor and franchisee Ofir Tzur noted that it is difficult for an individual who takes out a mortgage to know this figure, while mortgage advisors know this and haggle with the banks about the spread rates.

When interest rates were high and demand for mortgages fell, the banks took the opposite step, and were willing to lower their spreads in order to increase the number of their customers.

According to data published this week by the Bank of Israel, the expected decrease in interest rates (which also led to a decrease in bond yields), found expression in mortgages granted in the past year.

Thus, the average interest rate on unlinked mortgage loans stood at 4.8% in December 2025, compared with 5% in December 2024. Due to the decline in inflation, the average interest rate on the linked mortgages was 3.3% in December, compared with 3.2% in December 2024.

Record unlinked mortgages

In any case, the inflationary environment and the expectation of interest rate cuts attracted most mortgage borrowers to the unlinked track, which reached a peak of 87% of all mortgages in December, compared with 82% a year earlier and 67% of mortgages at the end of 2022, after the rate hikes.

Bank of Israel unexpectedly cuts interest rate

At the same time, the Bank of Jerusalem conducted a study and found that within five years, the long-term mortgage spread had become a widespread consumer phenomenon, which illustrates the depth of the economic pressure on households in Israel.

The study, conducted for the Mortgage Advisors Association conference to be held next week, shows that currently one in five borrowers in Israel wants to spread the mortgage period to the maximum (between 25-30 years).

Bank of Jerusalem CEO Yair Kaplan says, “We are seeing a clear change in borrower behavior on the ground. More families are seeking to spread their mortgages out over the maximum period, not out of a desire to ‘stretch’ the loan, but simply because they cannot afford the monthly repayments.

“The public is looking for resilience and long-term sustainability, not just low interest rates on the day of signing,” adds Kaplan.

Half of mortgages with leverage higher than 60%

According to Bank of Israel data, the average mortgage in Israel has crossed the NIS 1 million threshold, with nearly 50% of housing mortgages being taken out with leverage of more than 60% of the property value.

This is a major financial burden on borrowers, along with an increasing use of high debt in relation to the property value.

There has also been a consistent increase in the volume of loans in arrears, with debts totaling NIS 5 billion, and an upward trend over the past year, although these are still negligible volumes compared with the entire mortgage market, which is estimated at about NIS 650 billion.

According to Bank of Jerusalem data, between the end of 2021 and the end of 2025, the relative increase in the amount of mortgage repayments (due to the increase in interest rates) amounted to about 30%, significantly higher than the relative increase in the average salary, which increased by only 12% in this period.

“This is not a story about the periphery or a particular sector. We are seeing the increase in mortgage turnover rates in the central region as well, among young couples and homebuyers,” said Kaplan.

“The cost of living and wage erosion affect everyone and spreading out the mortgage, including through its turnover over the years, has become a tool for life management,” he adds.

Compensation for rate hikes in previous years

The government also sees the situation, and yesterday a draft law was published based on a proposal by the head of the National Economic Council, Prof. Avi Simhon.

Simhon proposes to compensate mortgage holders for part of the increase in their mortgage repayments caused by the intensive interest rate increases in 2022-2023. The wording of the proposal indicates that households that meet the criteria will receive assistance of up to NIS 1,000 per month, as help with mortgage payments.

Published by Globes, Israel business news – en.globes.co.il – on January 15, 2026.

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