Why Central Bank Rate Cuts Bypass Borrowers: The 15% Pass-Through Reality

When the Bank of Israel cuts its benchmark rate, mortgage borrowers assume their monthly payments will fall. They usually don't—at least not by much. The average unlinked mortgage interest rate stood at 4.81% in the second quarter of 2026, down from 4.89% in the fourth quarter of 2025, a fall of just 8 basis points against roughly 52 basis points of policy easing over the same window, a pass-through of about 15%.

This gap—52 basis points eased by the central bank, only 8 reaching borrowers—is not a measurement error or a lag. It reveals a structural shift in how mortgage affordability works in Israel. The bank is no longer the primary force controlling what you pay each month. Lenders are.

How the 15% Pass-Through Became Israel's New Mortgage Reality

Very little of the central bank's easing has reached borrowers because Israeli banks have been reported to have widened their margins on new mortgages. This widening happened quietly, in the months between the Bank of Israel's November 2025 cut and its May 2026 cut.

The timeline matters. After holding at 4.5% from January 2024, the Monetary Committee cut to 4.25% on November 24, 2025, to 4% on January 5, 2026, then cut to 3.75% on May 25, 2026, and to 3.5% on July 6, 2026, with the prime rate fixed at the policy rate plus a spread of 1.5 percentage points, accordingly standing at 5%.

Yet during this entire easing cycle, mortgage rates barely budged. A buyer in May 2026 paid 4.81% for a fixed, unlinked mortgage—just 8 basis points lower than the rate in December 2025, despite five consecutive quarter-point cuts.

Why Banks Widen Margins When Rates Fall

The mechanism is simple: banks don't automatically pass the full value of declining market rates on to consumers—as market conditions improve, banks sometimes widen their profit margin a bit, and borrowers still get a reduction, just not the full decrease reflected in the markets.

This is rational lender behavior. Competition is weak. Inventory sits. Demand is soft. In this environment, banks can hold pricing and protect margins because borrowers have few alternatives.

The Numbers Behind the Margin Squeeze

Measured over a full year, from the second quarter of 2025 to the second quarter of 2026, mortgage rates fell 23 basis points against 75 basis points of policy easing. This is a full-year pass-through of roughly 30%, still well below what economists expect in a competitive market.

Both windows show the same pattern: the central bank moves. The banks hold. And the gap widens each cycle.

Prime-Linked Mortgages: The Small Consolation

The one exception is prime-linked mortgages, where the rate always moves mechanically with the Bank of Israel's policy rate plus a fixed 1.5% spread. A 0.25% cut in the Bank of Israel rate translates into a reduction of around 15 shekels per month for every 100,000 shekels borrowed in the Prime track, and because the Prime portion of most modern mortgages is relatively small, the overall impact is similarly modest—usually only a few dozen shekels per month for the average borrower.

For borrowers on fixed or semi-fixed tracks—which is most people—the relief is even thinner. Most mortgage holders will see minimal annual savings, around 876 shekels.

Comparison Table: What a 50bp Central Bank Cut Really Delivers

*Varies by loan size and mix. Most modern mortgages have prime on only 10–30% of outstanding principal.

The Practical Shift: From Policy to Pricing

What changed between 2021 and 2026 is structural. Mortgage affordability is now determined more by individual lender pricing decisions than by the headline policy rate, with the practical battleground being product-level mortgage pricing and lender competition, not headline monetary policy alone.

For buyers and refinancers, this means central bank press releases are now nearly irrelevant. What matters is whether you refinance at the exact moment bond yields dip, whether you pick a bank that's aggressive on pricing, and whether you have the income profile to negotiate a better margin.

Why Now? Three Structural Reasons

First, mortgage borrowing ran at roughly NIS 9.5 billion in seasonally adjusted terms in both April and May 2026, still about 7.5% above the 2025 average, but demand is soft relative to supply. Banks don't need to compete. Second, unsold inventory remains elevated, removing pressure to loosen pricing to attract buyers. Third, the prime rate component of most mortgages has been engineered down in the last decade—modern mortgages now have much smaller prime tracks, so central bank cuts affect fewer shekels in fewer borrowers' pockets.

What Borrowers Should Assume About Future Rate Cuts

According to the Bank of Israel's current macroeconomic forecast, the interest rate is expected to fall by a cumulative 0.5% to 3.5% by the end of 2026, assuming a stable geopolitical environment and sound fiscal situation. That is 50 more basis points easing.

Based on the current pass-through rate of 15%, borrowers should expect to see no more than 7–8 basis points of that cut in their actual mortgage rates. A 50-basis-point easing would deliver perhaps 150 shekels per month in relief on a NIS 1 million loan—real money over time, but not transformational.

For those refinancing, the timing of a cut matters more than the size. Markets price in future cuts months early, so typical fixed and semi-fixed rates were already hovering around the 4.8%–5% range by the summer of 2025, and today they've already dipped below 4.8%, meaning the benefit of that rate cut has already quietly flowed into the mortgage market.

FAQ: Pass-Through and Your Mortgage

Q: Should I wait for the Bank of Israel to cut rates before buying?

A: The central bank's path is one factor, but markets have already priced in much of it. If you are waiting for a 3.5% mortgage rate when the Bank reaches 3.5%, you will be disappointed—rates on long-term fixed mortgages are likely to remain in the high 4% range or higher, because lender margins are not shrinking. The timing of your purchase (and your ability to refinance later) matters more than waiting for a specific central bank cut.

Q: Why don't Israeli banks pass through rate cuts like banks in other countries?

A: Competition matters. In many countries, dozens of mortgage lenders compete aggressively, forcing pass-through closer to 80–90%. In Israel, the market is more concentrated, and demand is currently soft. Banks can widen margins without losing market share. As demand recovers or new lenders enter, pass-through may improve—but today, it is weak.

Q: Is there a way to lock in better rates now?

A: Refinancing is one tool. If you have an existing mortgage at a higher rate, refinancing into a new one when bond yields dip (before the Bank cuts) can capture market pricing that the central bank cut will later validate. Comparing multiple banks and negotiating margins is essential—lenders offer different spreads to different borrowers. Fixed-rate loans offer certainty; prime-linked loans offer automatic cuts, but only on a small slice of the total.

Q: Does the 15% pass-through mean the central bank is powerless?

A: No. The central bank still influences the economy through expectations, business confidence, and overall financing conditions. But for individual mortgage holders seeking immediate relief from a rate cut, the pass-through to actual mortgage rates is slow and partial. The policy matters. The transmission to borrower payments is broken.

What Central Bank Cuts Actually Signal

The real value of a Bank of Israel rate cut today is not in the immediate mortgage relief—it is in the signal. Each cut says inflation is under control, economic recovery is proceeding, and the central bank sees room to ease further. This confidence gradually filters into lender behavior over months, not weeks. Long-term fixed rates reflect this slow healing.

For aliyah-bound buyers or foreign investors planning a multi-year hold, the 2026 easing cycle will eventually make mortgages cheaper. But it will not happen at announcement. It will happen in the refinancing window, in the next lender's pricing, and in the next competitive battle for market share—if those battles ever come.

The uncomfortable truth: borrowers who needed relief today have been frozen out by the 15% pass-through. Only those who can wait, refinance, shop lenders, and time market moves will capture the full benefit of a year's worth of central bank easing.