What Really Affects the Cost of Your Mortgage? Term, Mix and Interest Rate
An apartment is the biggest deal most people make in their lives, and the interest on the mortgage is one of the factors that will affect their financial situation the most over the years. Most people focus on the interest rate the bank offers. In practice, in order of impact on the total cost:
The loan term.
The makeup of the mortgage mix.
The interest rate.
1. The loan term
A ₪1 million mortgage at 4% interest:
A 30-year term: a monthly payment of ₪4,774, and total interest payments of about ₪718,700.
A 25-year term: a monthly payment of ₪5,278, and total interest payments of about ₪583,500.
Shortening the term by 5 years raises the monthly payment by ₪504, and saves about ₪135,000 in interest.
2. The makeup of the mix
Variable rate: may rise during the term if interest rates in the economy go up, so it carries risk.
Fixed rate: gives certainty and stable payments. It's usually higher than the variable rate, and you can think of it as a kind of insurance for stability.
CPI linkage: very common in Israel. On a CPI-linked track, the principal rises along with the consumer price index, so both the principal and the payment may grow.
The right mix depends on your personality, the stability of your income and your plans for the future.
3. The interest rate
The same ₪1 million mortgage, over 30 years:
At 4% interest: a payment of ₪4,774, and total interest of about ₪718,700.
At 3.9% interest: a payment of ₪4,717, and total interest of about ₪698,000.
Lowering the interest rate by 0.1% saves about ₪20,700 over 30 years, and reduces the monthly payment by ₪57. That's a real saving, but much smaller than the saving that comes from shortening the term or choosing the right mix.
The bottom line
The goal is to build a plan tailored to you: to pay the bank back as little as possible over the years, with a level of risk that suits you. Negotiating the interest rate is important, but it's the last step, not the first.
Already have a mortgage? You can check whether refinancing pays off for you. Planning a new mortgage? Book an introductory call.
This article is for general information only and does not constitute personal advice. Calculations are based on a Spitzer amortization schedule (equal monthly payments), without CPI linkage.
