A reduction that can reach hundreds of thousands of shekels: the impact of interest rate cuts on mortgages

The Bank of Israel's decision to lower the interest rate today (Tuesday) by a quarter of a percent, for the third consecutive time and the fifth since November 2025, to 3.25%, will take effect this coming Thursday and will significantly reduce repayments for mortgage borrowers. In addition, businesses that took out loans of millions of shekels will enjoy a reduction of thousands of shekels in repayments.

The interest rate reduction will affect almost all areas of the economy. It will also likely lead to the strengthening of the dollar and a gradual rise of the American currency. Today, the exchange rate of the American currency was set at 3.01 shekels, and after the publication of the interest rate decision, it strengthened in continuous trading to 3.02 shekels, and is even expected to rise further. The strengthening of the dollar will lead to an increase in the cost of some imported goods and raw materials, and will slightly affect the rise in inflation in the coming months. On the other hand, in previous interest rate reductions, even if there was an increase in the dollar exchange rate, it was temporary, and the shekel strengthened against the American currency quite quickly.

In addition, the weakening of the shekel and the lowering of the interest rate are expected to reduce the volume of deposits in shekels, on which the interest rate will also be further reduced by the banks. Estimates suggest that, as in the past, part of the money that will be released will move to the stock market and cause, over time, rises in the prices of some stocks. At the same time, the drop in interest rates will harm bank profits to some extent.

Following the drop in the prime rate, there is significant relief in the monthly repayments of mortgage borrowers in Israel, especially in tracks linked to the prime. If you calculate the reduction from the beginning of the interest rate cut in November 2025, when the prime rate was still at 6%, and until now when it has dropped to 4.75%, it is a saving that can reach about 126,000 shekels for someone who took out a mortgage of 450,000 shekels for a period of 30 years. It is important to note that the reduction increases significantly more as the mortgage borrower takes a larger loan and spreads it over a longer period.

In calculating only the current reduction from a prime rate of 5% to 4.75%, the savings for the entire mortgage period are:

1. 20,677 shekels for a mortgage of half a million shekels for a period of 25 years.

2. More than 41,000 shekels for a mortgage of one million shekels.

3. More than 62,000 shekels for a mortgage of 1.5 million shekels.

The Association of Mortgage Consultants stated:

"The interest rate reduction today joins a cumulative decrease of 1.5% from the peak level, but the way back is much slower than the way the interest rate rose. Within about 13 months, the interest rate jumped from 0.1% to 4.75%, and now the decrease is taking place gradually and cautiously. It should be noted that a falling interest rate environment creates an opportunity to examine mortgage refinancing and re-check the structure of the loan and the monthly repayment."

The association identifies changes in borrower behavior in recent months and a gradual increase in the choice of index-linked tracks, whose weight has risen from a low of about 10% to more than 20% today. This shows that the public is starting to re-examine its mix in light of the drop in interest rates, but it is important to remember that every track has its own price and risk, and a decision on a mix should not be based only on the question of where the interest rate is expected to go.