Principles for Building a Stable and Safe Mortgage Mixture
Many clients who consider themselves risk-averse reach for the same solution: bumping up the share of the mortgage mixture allocated to the fixed unlinked track (KALATZ). The logic makes sense. The KALATZ track has clear upsides: no volatility, no exposure to shifts in Israel's macroeconomic environment, and a monthly payment that's known up front for the entire term. It really is the most stable loan there is.
But that stability comes at a price. Because the bank shoulders all the risk itself — inflation risk, interest rate risk — it charges a premium for it. That's why the KALATZ loan is also the most expensive loan in the mortgage mixture.
The trap: building a mortgage under constraints
Here's where the trap springs. A mortgage is always built under constraints — there's a set amount to borrow and a maximum monthly payment you can handle. The implication: if you pour more money into one loan, you necessarily take it away from the others.
When a large share of the budget goes to KALATZ, less "room" is left in the monthly payment for the other loans. The result: the other loans get stretched to longer terms, or you're forced to increase the portion linked to the Consumer Price Index (CPI). Either way, the overall risk of the mortgage mixture actually rises.
Framing bias: seeing the tree and missing the forest
What's happening here is a textbook case of framing bias. We lock onto one narrow question — "what percentage of KALATZ do I have in my mortgage mixture?" — as if that were the only gauge of stability, while ignoring the effects on everything else in the mortgage mixture.
We obsess over the loan duration of one-third of the mortgage mixture (the KALATZ) and completely overlook the fact that the other two-thirds have grown longer, more CPI-linked, and riskier. The mortgage mixture "looks" safe on paper, but in practice the overall risk has climbed.
Three principles for building a truly stable mortgage mixture
First principle: address the problematic loans, not the good ones
The common instinct is to shorten the KALATZ loan — "that way we'll finish it faster." But that's exactly backwards. The KALATZ loan is already stable; shortening it doesn't add much to the stability of the mortgage mixture.
Instead, focus on the volatile loans — the variable-rate and CPI-linked ones. Shortening their duration sharply cuts your exposure to future changes in interest rates and the index, so they become less volatile.
Second principle: fewer problematic loans is better than more KALATZ
Instead of handing the lion's share of the mortgage mixture to KALATZ, it's worth considering a different approach: trim the KALATZ portion, stretch it over more years, and use the freed-up monthly payment to shift toward more stable loans in the rest of the mixture.
In practice: fewer variable CPI-linked loans, less prime-rate exposure, and more variable unlinked loans over longer terms. The result is a more balanced mortgage mixture with fewer "ticking time bombs."
Third principle: avoid loans that could "blow up"
A stable mortgage mixture is also built by avoiding risky structures:
A grace period longer than three years creates a "bubble" that bursts when the grace period ends and the monthly payment jumps all at once.
Mizrahi Tefahot Bank used to market (before the rate hike on this track) a very long grace period on the prime-rate track in order to shorten the duration of the fixed tracks. That mortgage mixture blew up in the faces of everyone who chose it.
Avoid loans you "might" pay off depending on how they behave down the road. The uncertainty is just too high. And as long as we keep the early-prepayment option open, we can't really put that money to work in worthwhile long-term investments.
A practical example: when the "safe" mortgage mixture is actually riskier
To bring these principles to life, let's look at two mortgage mixtures for a 1.75 million NIS mortgage with the exact same monthly payment.
The client, who wanted a stable mortgage mixture, put 40% of the mortgage into KALATZ. On paper that looks conservative. But what actually happened? To stay within the monthly payment constraint, he was forced to put 27% into a variable CPI-linked loan over 25 years — one of the riskiest loans there is.
For the exact same monthly payment, the system built a completely different mortgage mixture:
- CPI linkage dropped from 27% to just 17%
- The amount of money in variable CPI-linked loans (the riskiest) dropped to 0%
- And the mortgage mixture was cheaper over the life of the mortgage to boot
Client's mortgage mixture
40% fixed unlinked (KALATZ), 27% variable CPI-linked (MATZ)
System-recommended mortgage mixture
17% fixed unlinked (KALATZ), 7% variable unlinked (MALATZ)
Key Differences
Summary
A stable mortgage mixture isn't measured by the percentage of KALATZ in it. It's measured by the overall exposure to volatility — the duration of the risky loans, the extent of CPI linkage, and a structure with no nasty future surprises. Sometimes a mortgage mixture with less KALATZ is actually the safer one — as long as it's built right.
Good luck!