One of the most confusing terms for people trying to learn about mortgages is the word “tracks.” What is the difference between “interest rates” and “tracks,” and how is the “mortgage loan composition” created?
Let us begin with the simpler of the terms: The “interest” is the price that we pay for the product called “the loan” (more on that in the essay titled “Mortgage Costs” ). A mortgage loan is generally composed (hence the term “composition”) of more than one type of interest formula. The different types of formulas are called “tracks.” In the following paragraphs we will outline the main tracks, followed by a summary table, so as to hopefully enable you to better understand the jumble of terms thrown your way during your initial meetings with the banks.
Fixed-rate, index-linked mortgage – a mortgage plan in which the principal and interest rate are linked to the CPI (Consumer Price Index). The interest rate is determined in advance and does not change over the life of the loan. The interest rate is higher as the duration of the loan is longer. After many years over which the linkage worked in only one direction – only increasing with the CPI, this distortion has been amended and currently, if the index remains the same or decreases, the result will be negative linkage.
Fixed-rate, non-linked mortgage – a mortgage track in which the principal and interest rate are not linked to the CPI. The interest rate is determined in advance and does not change over the life of the loan. The interest rate is higher as the duration of the loan is longer. The interest rate in this kind of track will be higher than the interest rate in a linked track, in order to “compensate” the bank for the loss of the linkage.
USD/EUR-linked mortgage – the principal and interest rate in this track are linked to the dollar or euro exchange rates. The interest rate is adjusted based on Libor interest rates, along with an additional fixed margin percentage that is determined by the bank. The Libor interest rate is updated once every three months in most banks, although other banks may do so at a different frequency. This kind of track also includes a negative linkage, which means that if the exchange rate is to fall, the loan principal in this track will become eroded.
Mortgage at Prime lending rate – in this track, the interest rate is determined based on the banks’ Prime lending rate (Israel Bank’s interest rate + 1.5%), plus or minus a fixed margin percentage that is determined by the bank for each loan individually. This track is in shekels; it is not linked to the CPI. Early repayment fees are not charged in this kind of track.
Mortgage with adjustable interest – this is in essence a mortgage loan with a fixed interest for a predetermined period of time. The calculation of the interest rate is performed using a certain anchor – calculated differently in every bank – plus a margin percentage. In each ending “station,” the anchor is updated, while the added margin remains unchanged. Thus, if the anchor at the start of the loan was 2%, and the added margin was 1%, and the track is to be adjusted every five years, and after five years the anchor was raised to 4%, then the client will now pay 5% interest rate over the next five years (4% new anchor + 1% fixed margin). This kind of track can either be linked to the CPI or not, and may include prepayment charges, except at the exit points (the stations).
The table below briefly summarizes the various tracks and the advantages of each. The purpose of the table and this essay is to simplify the terminology and provide the reader with a basic understanding of the mortgage world. Nevertheless, we must emphasize that the information that we have shared in this essay is in no way sufficient for an in-depth understanding of the tracks and their appropriateness for each borrower and his particular situation. When attempting to plan a specific composition, we strongly urge you to contact us.
| Track | Fixed,Linked | Fixed, Non-Linked | Prime | Adjustable,Linked | Adjustable,Non-Linked | Exchange Rate |
| Definition | Fixed interest rate for the entire duration of the loan.Principal and interest rate linked to CPI | Fixed interest rate for the entire duration of the loan.No linkage. | Interest rate changes throughout the life of the loan based on Prime lending rate, plus/minus a fixed rate. | Interest rate changes at predetermined times (“stations”).Principal and interest rate linked to CPI. | Interest rate changes at predetermined times (“stations”).No linkage. | Loan in ILS, linked to exchange rate (USD/EUR).Interest rate changes based on Libor interest rate. |
| Type of Linkage | Linked to CPI | No linkage | No Linkage | Linked to CPI | No Linkage | Linked to Exchange Rate |
| Early Repayment Terms* | Capitalization differentials fees apply | Capitalization differentials fees apply | No fees | Capitalization differentials fees apply except at exit points** | Capitalization differentials fees apply except at exit points** | No fees |
| Advantages | Fixed, stable interest rate | Fixed, unchanging repayments | No linkage and interest rate may decrease | Interest rate relatively lower than fixed interest rates. Exit points. | Interest rate relatively lower than fixed interest rates. Exit points. | Chance of interest rate decreasing as well as chances of downward linkage |
* All tracks involve a penalty charge for neglecting to provide prior notice, as well as fixed handling fees (a few dozen shekels).
** There is no capitalization differentials fee in a yearly-changing adjustable interest track.