Why can a short-term loan from parents make the mortgage more expensive?

A short-term loan creates a bottleneck in your cash flow. It eats up a large chunk of the monthly payment and forces you to stretch out the bank mortgage, which means higher interest payments over the long run.

Is it worth accepting an interest-free loan from parents?

It depends on the terms. If the loan runs for a short period (say, 7 years) with high repayments, it can hurt your mortgage mixture. You're better off taking an outright gift (with no repayment), or a longer-term loan with lower repayments.

C: The Parents' "Gift" That Almost Choked Us

The Parents' "Gift" That Almost Choked Us

In this article we will tell the story of Michal and Avner, a couple who bought an apartment worth 1.8 million NIS. After receiving significant help from family, they accumulated 720,000 NIS in savings and were left needing a mortgage of 1.08 million NIS.

The parents' offer

Michal's parents offered a generous "gift": an interest-free, non-indexed loan of 80,000 NIS for seven years, with a monthly payment of 953 NIS.

The couple's total repayment capacity was 6,000 NIS per month, including the family loan. Sounds like a great deal, right?

What problem did we identify?

The family loan, however well-intentioned, created a critical flaw in their plan:

The 80,000 NIS loan represents only 7.4% of the total debt
But it eats up 16% of the monthly payment!
The short repayment period (7 years) forced the couple to take a longer mortgage from the bank
The result: a significant increase in the total cost of the loan

The solution we proposed

Instead of accepting the family loan, we recommended that the couple borrow the full amount (1.08 million NIS) from the bank.

Shortening the mortgage term from 25 years to 21 years
Savings of over 100,000 NIS in future interest payments
Greater flexibility in managing the monthly cash flow

Why does this happen?

A very short-term loan (7 years) that cannot be extended creates a "bottleneck" in cash flow. It forces you to fit all the other loans around it, and that usually means extending the bank mortgage.

And when you stretch out the mortgage, you pay more interest. A lot more.

The practical conclusion

Do not accept short-term loans from non-bank sources when they constitute the shortest term in your mortgage mixture.

If the parents want to help, they're better off giving an outright gift (with no repayment), or making the loan longer-term with lower payments.

Remember:sometimes a "gift" that looks good on paper can cost you a lot of money in the long run. It's always worth checking how it affects the overall picture before you decide. In the mortgage calculator you can compare a short-term loan with a long-term one and see the impact on the monthly payment and the total cost.