The Consumer Price Index is a statistical figure published by the Central Bureau of Statistics (CBS) on the 15th of each month. The index reflects the change in cost of a fixed "basket of products" consumed by the average Israeli family. The basket includes food, housing, transportation, education, health and more. When the prices of products in the basket rise, the index rises – this phenomenon is called inflation.
In the mortgage field, the index plays a crucial role in tracks that are "index-linked". When you take a loan in a linked track, your balance and monthly payment are updated according to changes in this index. Therefore, when seeking mortgage consultation, one of the first issues examined is the borrowers' exposure to index changes and the associated risk.
Many mistakenly think that the index only affects the interest rate, but the most devastating impact is on the principal (original debt amount). If you took 500,000 NIS in an index-linked track, and the index rose by 3% in a year, your debt grew nominally by 15,000 NIS, even before calculating the interest. This is a situation where borrowers pay for many years but the debt hardly decreases.
When the principal balance rises following the index, the bank spreads the new and higher balance over the remaining loan years. The direct result is an increase in the monthly payment. In long-term mortgages, cumulative index increases can raise the monthly payment by hundreds or even thousands of shekels over the life of the mortgage.
Suppose you took a mortgage of one million NIS, of which 500,000 NIS is in an index-linked track. If the annual inflation is 2.5%, after just one year, your debt in this track will grow by 12,500 NIS. This means that even if you paid monthly payments for a year, your total debt balance may remain the same or even grow.
Despite the risks, index-linked tracks have one distinct advantage: their initial interest rate is significantly lower than non-linked tracks. This allows reducing the initial monthly payment, which is especially critical for young couples in the process of first-time home mortgage consultation, whose current available income is low but expected to rise in the future.
The wisdom lies in building the mix. An experienced mortgage advisor will know how to combine linked tracks for relatively short periods, or with exit stations that allow early repayment without significant penalties. The goal is to enjoy the currently low interest rate, but neutralize the index risk in the long term.
Don't put all your eggs in one basket. Combine a prime track (not index-linked) and fixed non-linked tracks to ensure stability in monthly payment.
If you chose an index-linked track, try to take it for as short a period as possible. The shorter the period, the faster the principal repayment rate compared to the index impact.
Conduct periodic mortgage reviews. If the index starts to run wild, it may be worth refinancing the mortgage and switching to more solid tracks, even at the cost of slightly higher interest.
Our team specializes in building mortgage mixes personally tailored to your repayment capabilities and market forecasts. Don't let inflation manage your mortgage.
