A צמוד למדד mortgage is a mortgage track linked to the Consumer Price Index (CPI).
How it works: Each time the CPI rises, your remaining mortgage balance goes up to reflect the CPI change and the bank applies your interest rate to the new, larger amount. Essentially you're paying interest on inflation, not just on principal.
Example: I reviewed a file for someone who took out a ₪1,200,000 mortgage at a 3.1% rate. After 5 years and over ₪240,000 in payments, his remaining balance was ₪1,170,000. Just ₪30,000 less than where he started. Why? Because the CPI kept rising and therefore his balance did as well.
Why would anyone agree to an inflation linked mortgage? Because banks love to promote them and for good reason (for them). Inflation linked mortgages almost always come with a lower base interest rate, which makes them look attractive in marketing ads and online calculators. But what the ads and calculators don’t highlight is the real cost of the mortgage rising over time.
When does an inflation linked mortgage make sense?
- You plan to pay off the loan quickly, before inflation has time to pile up.
- Inflation is expected to stay very low or negative.
- You are combining it with other mortgage tracks to strategically lower your overall monthly payment in the short term.
But these are exceptions, not the rule.
Bottom line: An inflation linked mortgage track can work for some borrowers, especially in low inflation periods, but it’s a gamble. If inflation rises (like it has in recent years), you might find yourself owing a bit less than what you borrowed, in certain situations, even more than you borrowed, even after years of payments (think of it like student loans or credit card debt, in that just because you make monthly payments doesn't mean your balance will be significantly lower over time). An experienced mortgage broker can help you evaluate whether a inflation-linked mortgage is a smart option based on your specific financial picture. Remember, a lower interest rate doesn’t necessarily mean a cheaper mortgage. Rather look at the entire picture to understand your short, medium and long term payments, as sometimes a “cheap looking” mortgage is really super expensive.