The Bank of Israel published a research box for its forthcoming Annual Report for 2024 examining why mortgage spreads in Israel have declined over the past two years. It attributes around a quarter of the decline to increased competition, with the remainder explained by narrowing spreads following the interest rate increase and a drop in mortgage demand, against the backdrop of consumer reforms and the Swords of Iron War. The report defines the mortgage spread as the gap between the interest rate on a mortgage track and an anchor rate derived from the zero-coupon government bond yield curve (by indexation and duration), and notes that spreads reflect costs and pricing factors such as borrower risk, operational costs, and potentially banks’ market power. It highlights that new mortgage borrowing fell sharply starting in the second quarter of 2022 as the Bank of Israel’s interest rate rose, with banks potentially absorbing part of higher marginal funding costs to limit the contraction in lending, compressing spreads. A consumer reform introduced in September 2022 aimed to improve transparency and comparability of offers, including standardized preliminary approval formats (with three Bank of Israel-defined standardized packages) showing expected total interest, expected total payments, and the highest expected monthly payment, alongside faster approvals and online application and approval; the spread decline became consistent from September 2022 and continued after the policy rate stabilized in June 2023 and through the mortgage market recovery that began in the second quarter of 2024.

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