How Is Mortgage Interest Calculated in Israel? A Worked Guide

The short answer: mortgage interest is calculated every month on the balance still outstanding that month. Take the annual rate, divide it by 12 and multiply by the balance. On an ₪800,000 loan at 4.6%, the first month's interest is 800,000 × 4.6% ÷ 12 = ₪3,067. Whatever is left of your monthly payment after interest reduces the balance, so next month's interest is slightly lower.

Everything else — Shpitzer or fixed principal, Prime, CPI indexation — is a variation on that rule. Below we go through each one with real numbers. Every figure in this guide was computed with our mortgage calculator, so you can reproduce it there.

The formula: monthly interest on the balance

Every month three things happen, in this order:

This month's interest = outstanding balance × (annual rate ÷ 12)
Principal repaid = monthly payment minus this month's interest
New balance = previous balance minus principal repaid

The rate the bank quotes (say 4.6%) is a nominal annual rate, so the monthly rate is simply 4.6% ÷ 12, about 0.383% a month. Further down we explain how it differs from the "effective" rate printed next to it in your mortgage offer.

Worked example: ₪800,000 over 25 years at 4.6%

Take a fixed, non-indexed track at 4.6% — close to the Bank of Israel's published average for that track in August 2026 (4.62%). An ₪800,000 loan over 300 months on a Shpitzer schedule (constant monthly payment):

Monthly payment: ₪4,492, constant for the whole term.
Month 1: ₪3,067 interest, ₪1,426 principal. The balance drops to ₪798,574.
Month 2: interest is computed on ₪798,574, so it falls to ₪3,061 and the principal part rises to ₪1,431.
Total interest over the term: ₪547,657. Altogether you repay ₪1,347,657 on an ₪800,000 loan.

The constant payment comes from the Shpitzer (annuity) formula: principal × r ÷ (1 − (1 + r)⁻ⁿ), where r is the monthly rate and n the number of months. You don't need to do it by hand — the calculator does, and shows the full month-by-month amortization schedule.

Why the early years are mostly interest

With a constant payment, the split between interest and principal shifts slowly. In our example:

Over the first 5 years you pay ₪173,570 in interest and only ₪95,961 of principal. After 5 years the balance is still ₪704,039.
Only in month 120 — after 10 years — does the principal part (₪2,248) first exceed the interest part (₪2,245).

That isn't a hidden bank fee; it follows directly from the formula: early on the balance is high, so the interest on it is too. It is also why early repayment or refinancing has the most impact in the first years.

Fixed principal: same interest, different split

On a fixed-principal ("keren shava") schedule you repay the same amount of principal every month — 800,000 ÷ 300 = ₪2,667 — plus that month's interest. Interest is computed exactly the same way (₪3,067 in month one here too), but because the balance falls faster, total interest is lower:

First payment: ₪5,733 (vs ₪4,492 on Shpitzer).
Last payment: ₪2,677.
Total interest: ₪461,533 — about ₪86,000 less than Shpitzer.

The price is a much higher payment in the early years, when income is usually lower. That's why most borrowers choose Shpitzer, while those who can afford the higher payment save interest with fixed principal.

Prime track: the rate moves with the Bank of Israel

Prime equals the Bank of Israel rate plus 1.5%. Since the 3 September 2026 rate decision the Bank of Israel rate is 3.25%, so Prime is 4.75%. A mortgage gets Prime plus or minus a fixed margin — for example Prime minus 0.5%, i.e. 4.25%.

The monthly calculation is identical, but every change in the Bank of Israel rate changes the monthly rate, and the bank recalculates the payment on the remaining balance over the remaining term. On the same ₪800,000 over 25 years:

At 4.25% the monthly payment is ₪4,334.
If after one year the Bank of Israel cuts by 0.25%, the payment drops to ₪4,226 (balance at that point: ₪781,638).
If it raises by 0.25%, the payment rises to ₪4,443.

The current rate and the average rates by track are on our Bank of Israel rates page.

CPI-indexed track: interest on a balance that moves

On an indexed track, the balance is first updated by the change in the Consumer Price Index, and then interest is computed on it. The rate itself is lower — the Bank of Israel published a 3.29% average for fixed indexed in August 2026 — but it applies to a balance that grows with inflation.

Take ₪800,000 over 25 years at 3.3% fixed indexed, assuming 2% annual inflation (close to the medium-term inflation expectations the Bank of Israel publishes):

Month 1: the balance is indexed up by ₪1,333 (800,000 × 2% ÷ 12) and interest is computed on the updated balance: ₪2,204.
First payment: ₪3,926 — lower than ₪4,492 on the non-indexed track.
Last payment: ₪6,460, because the payment is indexed and grows over the years.
After 5 years the balance is still ₪760,278 (vs ₪704,039 non-indexed).
Total paid: ₪1,526,599, of which ₪452,695 interest and ₪273,904 indexation. With zero inflation you would pay ₪1,175,908.

So a lower rate doesn't necessarily mean a cheaper mortgage: it all depends on actual inflation, which nobody knows in advance.

Nominal vs effective rate

A mortgage offer shows two rates. The nominal rate is the one you divide by 12 to get the monthly rate — and the one to enter in the calculator. The effective rate expresses the same rate compounded month by month over a year: (1 + nominal ÷ 12)¹² − 1. A 4.6% nominal rate equals 4.70% effective.

If you enter the effective rate instead of the nominal one, the calculator will show a slightly higher payment than the real one. When comparing offers from different banks, compare nominal to nominal.

Calculate it yourself

What will I pay each month? — the mortgage calculator computes the monthly payment, total interest and amortization schedule for any track, and for a mix of several tracks.
How much can I borrow? — the affordability calculator works backwards from the monthly payment you're comfortable with to the loan amount.
Is refinancing worth it? — the mortgage refinance calculator compares your current mortgage with a new offer, including an early-repayment fee estimate.

The figures in this guide are illustrative estimates, not financial advice. Your actual rate, payment and loan terms are set by your bank based on your details.