Why refinancing comes up when rates fall
Refinancing (מחזור משכנתא, michzur) means repaying all or part of your mortgage with a new loan, at your bank or another one. It becomes attractive when rates fall: the Bank of Israel cut its rate from 4.25% at the end of 2025 to 3.25% in September 2026. The main obstacle is the early repayment fee (עמלת פירעון מוקדם), often called the knas.
What the fee is made of
The fee is set by a Bank of Israel order, the Banking Order (Early Repayment of a Housing Loan), 2002. It has several parts:
- An operational (handling) fee, capped by the Supervisor of Banks.
- A no-notice fee of 0.1% of the amount repaid. You avoid it by giving the bank at least 10 days' notice and paying between day 11 and day 45 after the notice.
- The capitalization fee (עמלת היוון), the large part: it compensates the bank when market rates have fallen below your loan's rate.
- On CPI-linked loans, an "average CPI" fee, charged only if you repay between the 1st and the 15th of the month.
How the capitalization fee works
The bank discounts your remaining payments at the average mortgage rate published by the Bank of Israel for the remaining term, and compares the result with the same payments discounted at your loan's rate. The difference is the fee. If the average rate is now higher than your rate, there is no capitalization fee. The bank charges the lower of two calculations, so the fee is also limited by how far the average rate has fallen since you took the loan.
Which tracks pay it
- Prime, and any track whose rate can change at least once a year: no capitalization fee.
- Tracks that reset every few years: no capitalization fee if you repay on the reset date, only the operational fee.
- Fixed tracks (Kalatz, Katz): the capitalization fee applies whenever the average rate is below your rate.
- The state Zakaut loan: no early repayment fee at all.
Automatic discounts as the loan ages
On an ordinary bank loan, the capitalization fee is reduced by 20% once the loan is 3 years old and by 30% once it is 5 years old. Supplementary bank loans given to Ministry of Housing eligibles get 10% after 1 year, 20% after 2, 30% after 3 and 40% after 4. Repaying a few days after an anniversary instead of a few days before can save real money.
Worked example
Hypothetical figures, to show the method:
- Remaining balance: ₪800,000 on a Kalatz track at 5.3%, with 18 years left
- Loan age: 2 years and 11 months
- Bank of Israel average rate for the remaining term today: 4.4%
- New offer: 4.5% for the same 18 years
Fee: the remaining payments (about ₪5,755 a month) are worth about ₪863,400 at 4.4%, so the gross capitalization fee is about ₪63,400. Repaying today, with no discount, costs that amount. Waiting one month, until the loan is 3 years old, cuts it by 20% to about ₪50,700.
Lower payment: at 4.5% the payment falls to about ₪5,411, a saving of about ₪344 a month, or about ₪74,000 over 18 years before discounting. Against a fee of ₪50,700 that takes about 147 months, more than 12 years, to pay back.
Shorter term: keep paying about ₪5,755 a month at 4.5% and the loan ends after about 16.4 years instead of 18, saving about ₪110,000 in payments, more than twice the fee.
The lesson: when the new rate is close to the Bank of Israel average, the fee absorbs most of the gain, because it is designed to compensate the bank for that gap. Refinancing pays off mainly when you can get well below the average rate, when the part you move is Prime or at its reset date, or when you use it to shorten the term.
Before you refinance
- Ask the bank for a written payoff statement (דוח יתרות לסילוק) for the exact date.
- Check loan anniversaries (3 and 5 years) and reset dates.
- Give at least 10 days' notice to avoid the no-notice fee.
- On CPI-linked tracks, repay in the second half of the month to avoid the average-CPI fee.
- Compare the total cost of the new loan, not only the monthly payment.