You have 200,000 shekels available - close the mortgage or put the money in a deposit?
The Bank of Israel interest rate stands at 3.5%, deposits and money market funds still provide a decent return, but many mortgages cost 5% or more; on 200,000 shekels, the gap can reach thousands of shekels per year - and there are also considerations of tax, early repayment fees, and liquidity.
It could be a large bonus from work, an inheritance, a training fund that has been released, or simply savings accumulated over years: suddenly there are 200,000 shekels in the account that are not intended for immediate expenditure. This is, of course, a good problem, but the question of what to do with the money arises very quickly - especially when on the other side of the balance sheet sits a mortgage of hundreds of thousands of shekels. On one hand, the money can go into a deposit and generate interest. On the other hand, the same amount can wipe out part of the mortgage and save interest for years. In the current interest rate environment, the calculation often leans towards the mortgage, but the result depends on the actual interest rate the family is paying, the return they can get on the money, and the cost of early repayment.
The Bank of Israel interest rate stands at 3.5% and the prime rate at 5%. Bank deposits for a year offer a return that varies depending on the interest rate environment in the economy, the bank, the amount, and the bargaining power. Money market funds and MAKAM (short-term government bonds) provide an alternative for money sitting in a deposit, with money market funds having an expected return in the current interest rate environment hovering around 3.25%-3.35% after management fees. Suppose the family receives 3.5% per year on a deposit. On 200,000 shekels, this is 7,000 shekels gross. On a non-linked shekel deposit, the tax on interest is 15%, so about 5,950 shekels remain. The net return is actually slightly less than 3%.
On the other side of the balance sheet, data from mid-2026 points to an average projected total interest rate in the area of 5% for new mortgages, with gaps between banks. At Mizrahi, the projected total rate stood at 5.13%, compared to 4.70% at Beinleumi. The mortgage interest rate table published by the Bank of Israel monthly also explains why the average is misleading. For someone who already holds a mortgage, the relevant figure is the actual interest rate on the track they are considering repaying. A family paying 5% on those same 200,000 shekels saves interest at a rate of about 10,000 shekels per year at the beginning of the way. Compared to about 5,950 shekels net in a deposit, a gap of about 4,000 shekels is obtained in favor of reducing the mortgage.
At a mortgage rate of 4%, the initial saving reaches about 8,000 shekels, still higher than the net return of that same deposit. Over five years, the gap accumulates. 5% interest saved on 200,000 shekels is worth about 55,000 shekels, while a deposit yielding about 3% net generates about 32,000 shekels in the same period. The difference stands at about 23,000 shekels. To compete with a 5% mortgage, the deposit needs to give almost 6%. The interest saved on a mortgage is a saving that is not subject to tax. A debt at 5% interest that is wiped out saves interest payment at that rate on the remaining principal, while interest on a deposit must be taxed. For a deposit subject to 15% tax to compete with a 5% interest debt, it needs to yield about 5.9% gross. Deposits in the current environment are far from this level.
Alternative investments: funds and stocks
If not a deposit - maybe a money market fund, bonds, or a stock index? A money market fund holds very short-term instruments, and its return moves close to the Bank of Israel interest rate. Its advantages are daily liquidity and 25% taxation on real profit, meaning on the return beyond inflation, instead of 15% on every shekel of interest in a shekel deposit. In high inflation, this difference is felt, and in zero inflation, it almost disappears. MAKAM is a short-term government bond, for a year at most, and its return is also derived from the interest rate environment. Both of these instruments precede a mortgage only when it is particularly cheap, for example, an old track at 2%-3% interest.
A government bond offers a yield to maturity known in advance for those who hold until the end. Those who sell halfway are exposed to price changes: when the interest rate in the economy rises, the prices of existing bonds fall, and the actual return can be lower than that which appeared on the day of purchase. The longer the bond, the sharper the fluctuation. Its known return is valid under one condition only, that one holds until the maturity date. Average historical return is not a guaranteed return.
Mutual funds and ETFs that track stock indices have shown returns much higher than mortgage interest rates for decades. This figure describes the past and does not predict the next five years. Even the average itself inflates the picture: an index that rose 30% and then fell 20% shows an arithmetic average of 5% per year, but the investor is left with 4% over two years. Suppose those same 200,000 shekels are invested in a broad stock index, against a mortgage at 5% interest. Repaying the mortgage saves guaranteed interest of about 55,000 shekels in five years. In a scenario where the index rises 8% per year, the amount reaches about 294,000 shekels, and after a 25% capital gains tax, about 70,000 shekels remain. The tax applies only to real profit, so in practice, the amount may be slightly higher. The investment leads by about 15,000 shekels, meaning about 3,000 shekels per year. This is the reward for taking the risk.
In the second scenario, the first year ends with a 20% drop, followed by four years of 8%. The amount reaches about 218,000 shekels, the profit before tax stands at about 18,000 shekels, and after tax at about 13,000 shekels. Compared to 55,000 guaranteed shekels, mortgage repayment leads the investment by more than 40,000 shekels. Both scenarios are reasonable, and it is impossible to know in advance which one will materialize. There is another difference here that does not appear in the yield tables. The withdrawal date is determined by the family's needs and not by the market situation. Someone who needs the money in a year when the index falls realizes the loss and cannot wait for a recovery. The saving in mortgage interest does not depend on timing at all.
Fees and liquidity
Before transferring 200,000 shekels to the bank, one needs to check the early repayment fee. In the prime track, there is no prepayment penalty, and also in variable tracks at interest rate change points, the exposure to the fee is lower. In a fixed interest rate track, a fee of thousands and even tens of thousands of shekels can be created, depending on the loan conditions and interest rate gaps. The repayment fee is composed of five possible components, and the largest of them is born from the interest rate gap. The fee relies on the Banking Order from 2002, and its composition determines how much is actually paid.
Repayment that is carried out exactly at the exit station, the interest rate change date fixed in the contract, requires only the operational fee. Such a payoff costs tens of shekels, while in a fixed non-linked track the fee may reach thousands, and even there only if the average interest rate has fallen since taking the loan. The average non-linked interest rate currently stands at 4.56% and the linked one at 3.39%. The fee can turn a worthwhile payoff into a non-worthwhile one.
200,000 shekels in a mortgage are no longer available in the account. The liquidity consideration is sometimes more important than a difference of several thousand shekels. Paying off a mortgage turns liquid money into money trapped in walls. A family that transfers the full amount remains with a less leveraged apartment, but also with less available cash. Medical expenses, car replacement, an unemployment period, or renovation can create a need for new credit, the cost of which is significantly higher than mortgage interest. One can also split. Instead of transferring the full amount to the mortgage, one can leave part as a liquid emergency fund and direct the balance to repaying the expensive track. There is not much logic in saving mortgage interest if shortly after one needs to take an expensive loan to finance an unexpected expense.
