Refinancing Your Israeli Mortgage, Complete Guide
Refinancing (michzur mashkanta) can save you tens of thousands of shekels over the life of your mortgage, but only if you understand the penalty structure and timing. This guide covers everything you need to know about when and how to refinance in Israel.
What Is Mortgage Refinancing in Israel?
Refinancing means replacing your existing mortgage with a new one, either at the same bank or a different one. The new mortgage pays off the old one, and you start fresh with new terms, new rates, and potentially a different track structure. In Israel, refinancing is called michzur mashkanta.
Unlike in the US where refinancing is relatively straightforward, Israeli refinancing involves prepayment penalties (onshin peireon mukdam) on certain mortgage tracks. Understanding these penalties, and how to minimize them, is the key to a successful refinance.
Why Refinance?
There are several common reasons Israeli mortgage holders consider refinancing:
Lower interest rates
If market rates have dropped since you took your mortgage, refinancing at the new lower rates can significantly reduce your monthly payments and total interest paid over the life of the loan.
Restructure your track mix
Maybe you took on too much CPI-linked exposure and inflation has been higher than expected. Or you want to shift from variable tracks to fixed ones for more certainty. Refinancing lets you redesign your mortgage structure from scratch.
Shorten (or extend) your mortgage term
If your income has increased, you might want to shorten your term to save on total interest. Conversely, if cash flow is tight, extending the term reduces monthly payments.
Cash-out refinance
If your property has appreciated in value, you may be able to refinance for a larger amount and take the difference as cash, useful for renovations, investments, or other purposes.
Consolidate multiple loans
If you took additional loans against your property over the years, refinancing can consolidate everything into a single, more manageable mortgage.
The Prepayment Penalty Structure (Onshin)
The onshin, the prepayment penalty, is the single most important factor in evaluating whether refinancing makes financial sense. Not all mortgage tracks have the same penalty structure. Here is how it breaks down:
Prime Tracks, Minimal or No Penalty
Prime-based mortgage tracks have the lowest prepayment penalties of any track. The penalty is typically 0-0.2% of the outstanding balance, and in many cases there is no penalty at all. This makes Prime the easiest and cheapest track to refinance out of.
If your mortgage is primarily in Prime tracks, refinancing is nearly always feasible from a penalty perspective.
Fixed & CPI-Linked Tracks, Significant Penalties
For fixed-rate tracks (both CPI-linked and non-CPI), the prepayment penalty is calculated based on the difference between your locked-in interest rate and the current market rate for the same track. If you locked in at 5% and current rates are 4%, the bank is losing 1% per year for the remaining term, and they charge you for that lost income.
The penalty formula considers the remaining balance, the rate differential, and the remaining term. Penalties on fixed tracks can range from a few thousand to tens of thousands of shekels.
Important: Penalties apply when current rates are LOWER than your rate.
If current market rates are higher than your locked rate, the bank is not losing money, so the penalty is zero or minimal. This means refinancing out of a low fixed rate in a high-rate environment is essentially free.
5-Year Fixed & Variable CPI Tracks, Penalty Resets
For tracks that reset periodically (every 5 years), the prepayment penalty is recalculated at each reset point. If you time your refinance to coincide with a reset date, the penalty is minimal or zero. Between reset points, the penalty is calculated similarly to fixed tracks based on the rate differential.
This is why the 5-year mark is such an important milestone for refinancing decisions.
The Penalty Discount Schedule
Israeli law provides mandatory penalty discounts based on how long you have held the mortgage. These discounts reduce the prepayment penalty on fixed and CPI-linked tracks:
0%
Discount
Years 0 to 3, full penalty applies
20%
Discount
After 3 years, penalty reduced by 20%
30%
Discount
After 5 years, penalty reduced by 30%
These discounts are mandated by the Bank of Israel and apply across all banks. The 5-year mark is the sweet spot for most refinancing decisions, you get the 30% penalty discount, and if you have tracks that reset every 5 years, those penalties drop to near zero as well.
When Does Refinancing Make Sense?
The decision to refinance comes down to a simple equation: will the savings from the new lower rate exceed the costs of refinancing (penalties + fees)? Here are the factors to evaluate:
Likely Worth Refinancing
- Market rates have dropped at least 0.5-1% below your current rates across multiple tracks
- You are past the 5-year mark and eligible for the 30% penalty discount
- Your mortgage is primarily in Prime tracks (minimal penalties)
- You have more than 10 years remaining on your mortgage, more time to recoup the costs
- Your remaining balance is substantial, larger balances mean larger absolute savings
- Your current track mix no longer suits your risk profile or financial situation
Probably Not Worth Refinancing
- You are within the first 3 years and have large fixed-track balances (full penalties apply)
- The rate difference is small (under 0.3%), the savings may not cover the costs
- You have less than 5 years remaining on your mortgage, not enough time to recoup costs
- Your remaining balance is small, the absolute savings will be minimal
- You plan to sell the property within 2-3 years, better to wait and repay at sale
The Refinancing Process
Refinancing follows a similar process to getting a new mortgage, though it is typically faster since you already own the property:
Request a penalty estimate
Your current bank must provide you with a detailed penalty breakdown for each mortgage track within 10 business days of your request. This tells you exactly what it will cost to exit your current mortgage.
Get new mortgage offers
Submit your financial documents to 2-3 banks (or work with a mortgage consultant) to get competing refinance offers. Include your current bank, they may offer retention terms to keep you.
Calculate the break-even point
Compare the total cost of refinancing (penalties + new appraisal fee + any legal fees) against the monthly savings. How many months until the savings exceed the costs? If the break-even is under 18-24 months, refinancing is typically worthwhile.
Choose the best offer and apply
Select the bank with the best overall terms. The new bank handles the process of paying off your existing mortgage and registering the new lien. You will need an updated property appraisal.
Close and start saving
The new mortgage replaces the old one. The transition is seamless, you simply start making payments to the new bank at the new rate. The entire process typically takes 4-6 weeks.
Refinancing Costs Beyond Penalties
In addition to prepayment penalties, expect the following costs when refinancing:
| Cost | Approximate Amount |
|---|---|
| Property appraisal (shuma) | 1,500-2,500 NIS |
| Lawyer fees (lien transfer) | 3,000-6,000 NIS |
| Bank file opening fee | 0-2,000 NIS (often waived) |
| Tabu registration | ~160 NIS |
In total, non-penalty refinancing costs are typically 5,000-10,000 NIS. A good mortgage consultant can often negotiate to have the new bank cover some or all of these costs.
Same Bank vs. Different Bank
Refinancing at Your Current Bank
- Faster process, no lien transfer needed
- Lower administrative costs
- Bank may offer retention discounts to keep you
- Prepayment penalties may still apply on fixed tracks
- Less negotiating leverage without external competing offers
Moving to a Different Bank
- Maximum negotiating leverage, banks compete aggressively for refinance business
- Potentially better rates and terms
- Fresh start with a new bank relationship
- Requires a new appraisal and lien transfer
- Takes longer, typically 4-6 weeks vs. 2-3 weeks
The best approach is usually to get offers from external banks first, then bring those offers to your current bank and give them a chance to match or beat them. This way you get the best rate regardless of which bank you end up with.
Is Refinancing Right for You?
I will analyze your current mortgage, calculate the exact penalties, compare new offers from multiple banks, and give you a clear recommendation on whether refinancing will save you money, and exactly how much. Many of my clients save over 100,000 NIS over the remaining life of their mortgage.