There is something very attractive about the new bill to assist mortgage holders. Interest rates have been rising rapidly since 2022, and hundreds of thousands of families face a higher charge at the bank every month. Politicians are rushing to offer a simple solution: the state will subsidize the repayments. However, precisely because the idea sounds popular and intuitive, it is important to ask whether it actually promotes sound economic policy or rather represents yet another short-sighted move that will cause more harm than good.
The bill seeks to grant a monthly stipend to borrowers who took out mortgages before March 2022, as compensation for the rising interest rates. Proponents of the bill present it as a way to assist young middle-class families while also boosting private consumption after the war. But even if the desire to help young working families is genuine – and it is a completely legitimate goal – this proposal is not the way to go about it. The Prime Minister’s economic advisor Prof. Avi Simhon stressed that most beneficiaries will be families with young children and two breadwinners, aged 30–45. But this point actually exposes the proposal’s weakness: if the state wants to grant assistance to this particular group, it can do so directly in a targeted and equitable fashion, ensuring that every shekel actually reaches their pockets. It makes no sense to pour billions of shekels of public money into a broad and distorted mortgage subsidy simply because some of the money will incidentally also reach the group it is intended to help. Every shekel directed toward mortgage subsidies is a shekel that is not directed toward healthcare, security, education, or the targeted assistance of the truly disadvantaged.
In point of fact, the proposal is not targeted at young working families, but at homeowners with mortgages, which is a far broader group, a significant portion of whom are very well-off. Even those homeowners who have benefited from large increases in the value of their assets will receive assistance. Renters, meanwhile – often in a more difficult financial situation – will receive nothing.
Prof. Simhon drew a comparison to the COVID crisis, but this is problematic as well. During COVID, the state faced a forced shutdown of the economy, a sudden collapse of income, and extreme uncertainty. The situation now is entirely different. Unlike the COVID era, when the state itself froze a large portion of the country’s economic activity, current rising interest rates are simply part of a basic economic mechanism designed to curb inflation.
The macroeconomic argument that Prof. Simhon puts forward for “stimulating consumption” is equally unconvincing. If the government wants to boost demand, there are better ways to do so: cutting taxes, expanding work grants, or providing direct assistance to households in real distress. The specific choice to target mortgages seems not so much a coherent macroeconomic policy as an attempt to benefit a large and politically popular group.
Worse still: injecting additional money into the hands of borrowers at a time when the Bank of Israel is still battling inflation could actually delay future cuts to the interest rate. In other words, the state would be subsidizing the rise in interest rates, and in doing so, may well contribute to keeping them high.
It is precisely those who acted responsibly who will pay the price.
The most fundamental problem in this proposal is that the state is intervening in private contracts after the fact. A mortgage is a transaction that includes interest rate risk. Those who chose a variable-rate track knew – or should have known – that interest rates could also rise. When the state decides to retroactively subsidize part of the cost, it changes the rules of the game and undermines the contractual certainty on which the credit market depends.
The long-term implications are clear: financial institutions will begin to price the risk of future political intervention in advance, and credit will become more expensive for everyone.
The proposal also creates social distortions. It rewards borrowers who failed to minimize risk or to refinance their mortgage and penalizes those who acted with financial responsibility. It also ignores the fundamental disparity between homeowners – who benefit from rising property values – and those who have not managed to enter the housing market at all.
Beyond all the above, the very diagnosis of the problem is open to question. The proposal focuses on the nominal increase in monthly repayments, but the truly important measure is the ratio of repayments to income. According to analyses by the Bank of Israel, the burden has, in fact, remained stable for a considerable portion of borrowers when taking into account the rise in wages over recent years.
This does not mean there are no families who have been hurt. There certainly are. But there is no evidence of a systemic crisis that justifies a broad mortgage subsidy program. There is no collapse of the housing market, no sharp wave of insolvencies, and no threat to the banking system.
Where households have fallen into genuine hardship, the right approach is to assist them in a targeted manner, based on income and repayment capacity qualifications. A blanket mortgage subsidy, however, is a costly, distorted, and problematic measure, and it sends a dangerous message: Go ahead and take risks – if they materialize, the state will come and bail you out.
