Mad Hon · Housing cost

Understand the mortgage tracks before you choose a mix

Understand the mortgage tracks before you choose a mix. A step-by-step Mad Hon guide for your Housing cost score, written for olim.

1. Start from the fact that it is several loans, not one.
When an Israeli lender quotes you a mortgage, they are quoting a set of components: this much on one track at one rate, that much on another. Each component amortises on its own schedule and each can in principle be repaid or refinanced separately from the others. There is no single headline rate to compare against a friend, and there is no reversion date after which everything changes. Everything below is about the parts you are assembling, and the assembly is the actual decision.
2. Separate the two things that can move.
Two switches, not one, and conflating them is the most common mistake an arriving buyer makes. The first is whether the interest rate is fixed for the whole term or can change during it. The second is whether the outstanding principal is linked to the consumer price index or not. A track can be fixed and unlinked, fixed and linked, or variable and either. Knowing which switch a given track has flipped tells you what can happen to your payment and what can happen to your balance, which are separate risks.
3. Index linkage is the part with no equivalent where you came from.
On a linked track the outstanding principal itself is restated each month with the consumer price index, which the Central Bureau of Statistics publishes on the 15th of each month for the month before. That means you can make every payment on time, on schedule, and owe more than you did a year earlier. The interest rate quoted on a linked track is lower than on an unlinked one for exactly that reason: the linkage is a real cost that is not inside the quoted rate, so comparing a linked rate against an unlinked rate as if they were the same kind of number is comparing two different things.
4. Understand what the prime track is tied to.
Prime is the Israeli banking system base rate, defined as the Bank of Israel rate plus a fixed 1.5 percentage points. Your mortgage track is quoted as prime plus or minus a spread you negotiate with the lender, and that spread is the number you are bargaining over, not the 1.5. Prime does not drift or reset on a schedule: it moves only when the Bank of Israel rate moves, and the Monetary Committee publishes eight interest-rate decisions a year, with prime following immediately. The track is not index-linked. What you are accepting on it is that your monthly payment is not knowable in advance.
5. Know the rule that forces every offer to be a mix.
The Bank of Israel does not allow the variable-rate portion of a housing loan to exceed 66.66 percent of the loan, and caps the term at 30 years. So at least a third of whatever you borrow carries a rate that cannot change for its term. When a lender presents you with a split rather than a single product, that is not a sales preference and it is not negotiable away: it is the directive. Knowing that turns the conversation from whether to mix into what the mix should be.
6. Make two offers comparable before you compare them.
Ask each lender for the offer broken down by track: the amount on each, its rate, whether it is linked, its term, and the total repayment over the life of that component. Then compare total repayment rather than the monthly figure, because a mix that is cheaper this month is often built from a longer term. Ask every lender to price the same two or three shapes, so that what you are comparing is the lender rather than the shape. Applying to more than one at the same time is ordinary here, and an independent mortgage advisor who is not employed by a lender is a fourth quote rather than a substitute for the others.
7. See clearly what you are actually choosing between.
Each track pays for a different risk, and each has a scenario in which it turns out to have been the expensive one. A fixed unlinked track costs more up front for certainty and looks like an overpayment if rates fall. A prime track is cheaper when rates fall and is the one that hurts when they rise. A linked track has the lowest quoted rate and is the one that hurts when prices run. No combination wins in all three, which is why the real question is not which track is best but which uncertainty you can carry on the income you actually have. Your answer to the horizon question above, how secure the income is, and whether a rise in the payment would be absorbable or not are all inputs to that. Nobody can weigh them for you, and any adviser who names a mix before asking about them has not asked enough.

Understand the mortgage tracks before you choose a mix. A step-by-step Mad Hon guide for your Housing cost score, written for olim.

1. Start from the fact that it is several loans, not one.

When an Israeli lender quotes you a mortgage, they are quoting a set of components: this much on one track at one rate, that much on another. Each component amortises on its own schedule and each can in principle be repaid or refinanced separately from the others. There is no single headline rate to compare against a friend, and there is no reversion date after which everything changes. Everything below is about the parts you are assembling, and the assembly is the actual decision.

2. Separate the two things that can move.

Two switches, not one, and conflating them is the most common mistake an arriving buyer makes. The first is whether the interest rate is fixed for the whole term or can change during it. The second is whether the outstanding principal is linked to the consumer price index or not. A track can be fixed and unlinked, fixed and linked, or variable and either. Knowing which switch a given track has flipped tells you what can happen to your payment and what can happen to your balance, which are separate risks.

3. Index linkage is the part with no equivalent where you came from.

On a linked track the outstanding principal itself is restated each month with the consumer price index, which the Central Bureau of Statistics publishes on the 15th of each month for the month before. That means you can make every payment on time, on schedule, and owe more than you did a year earlier. The interest rate quoted on a linked track is lower than on an unlinked one for exactly that reason: the linkage is a real cost that is not inside the quoted rate, so comparing a linked rate against an unlinked rate as if they were the same kind of number is comparing two different things.

4. Understand what the prime track is tied to.

Prime is the Israeli banking system base rate, defined as the Bank of Israel rate plus a fixed 1.5 percentage points. Your mortgage track is quoted as prime plus or minus a spread you negotiate with the lender, and that spread is the number you are bargaining over, not the 1.5. Prime does not drift or reset on a schedule: it moves only when the Bank of Israel rate moves, and the Monetary Committee publishes eight interest-rate decisions a year, with prime following immediately. The track is not index-linked. What you are accepting on it is that your monthly payment is not knowable in advance.

5. Know the rule that forces every offer to be a mix.

The Bank of Israel does not allow the variable-rate portion of a housing loan to exceed 66.66 percent of the loan, and caps the term at 30 years. So at least a third of whatever you borrow carries a rate that cannot change for its term. When a lender presents you with a split rather than a single product, that is not a sales preference and it is not negotiable away: it is the directive. Knowing that turns the conversation from whether to mix into what the mix should be.

6. Make two offers comparable before you compare them.

Ask each lender for the offer broken down by track: the amount on each, its rate, whether it is linked, its term, and the total repayment over the life of that component. Then compare total repayment rather than the monthly figure, because a mix that is cheaper this month is often built from a longer term. Ask every lender to price the same two or three shapes, so that what you are comparing is the lender rather than the shape. Applying to more than one at the same time is ordinary here, and an independent mortgage advisor who is not employed by a lender is a fourth quote rather than a substitute for the others.

7. See clearly what you are actually choosing between.

Each track pays for a different risk, and each has a scenario in which it turns out to have been the expensive one. A fixed unlinked track costs more up front for certainty and looks like an overpayment if rates fall. A prime track is cheaper when rates fall and is the one that hurts when they rise. A linked track has the lowest quoted rate and is the one that hurts when prices run. No combination wins in all three, which is why the real question is not which track is best but which uncertainty you can carry on the income you actually have. Your answer to the horizon question above, how secure the income is, and whether a rise in the payment would be absorbable or not are all inputs to that. Nobody can weigh them for you, and any adviser who names a mix before asking about them has not asked enough.