In the previous article we described the third quadrant — low down payment and low monthly payment. Now we'll move on to the last quadrant in the resource allocation matrix.
The fourth quadrant: high monthly payment and low down payment
This quadrant fits people with the cash-flow capacity to take on a larger mortgage — and to keep up with it over time, while still saving and investing at the same time. Those who land here choose to leave the down payment out of the deal and instead take on a higher monthly commitment.
1. A larger mortgage can save / reduce the wealth surtax
When we have to cash out investments and large sums of money for the purchase, we can end up paying wealth surtax on the gains.
An extra tax levied on high earners. It's calculated as a fixed percentage of taxable income above a certain threshold, including capital gains from cashing out investments.
When significant investments are sold off in a single calendar year, taxable income jumps and may cross the wealth surtax threshold — creating an extra tax liability that wouldn't have arisen if the sale had been spread over several years.
Choosing a larger mortgage and making early prepayments along the way (spread over several years rather than a single one) can keep us below the wealth surtax threshold.
2. Capital gains tax deferral and reduction of the overall tax burden
Choosing a larger mortgage while holding on to your existing investments creates several tax advantages:
a. Tax deferral: As long as you don't sell the investments, you pay no capital gains tax. The money keeps working and earning a return on the full amount, including the portion that would have gone to tax.
Suppose we have 500,000 NIS in investments, of which 100,000 NIS is profit subject to 25,000 NIS in tax.
Alternative A — cash out and reduce the mortgage:
If we sell everything, we're left with 475,000 NIS, which we can use to reduce the mortgage. As a result, our monthly payment drops by about 2,470 NIS (assuming an unlinked mortgage with a 30-year term). We invest that saving every month at an 8% return.
Alternative B — keep the investments and take a larger mortgage:
We leave the 500,000 NIS invested at the same 8% return and take a larger mortgage.
Comparison over time — the gain generated each year
| Alternative A (liquidation) | Alternative B (keep) | |
|---|---|---|
| End of year 1 | 30,751 NIS | 41,499 NIS |
| End of year 2 | 64,054 NIS | 86,443 NIS |
| End of year 3 | 100,122 NIS | 135,118 NIS |
The gap between the alternatives widens over time. At the end of the first year the difference is about 10,788 NIS; by the end of the second it grows to about 22,388 NIS; and by the end of the third it already stands at about 34,996 NIS. This is the power of compound interest: the larger capital in Alternative B earns a return on a higher sum, and the gap widens faster and faster year after year.
b. Lowering the overall tax rate: When you cash out investments to take a smaller mortgage, you pay capital gains tax and then start saving all over again out of current income. Earned income is taxed at rates far higher than capital income. Choosing a larger mortgage preserves the assets taxed at the lower rate, instead of converting them into new savings funded by heavily taxed income.
When not to choose a low down payment and high monthly payment
1. Wanting to finish the mortgage early and "then start investing"
This approach is a trap. Someone who pours all their resources into paying off the mortgage quickly plans to start investing only once it's done. The problem is that by then they'll be older, perhaps less secure in their job, and left with fewer years to invest the money and let it grow.
It's better to invest smaller amounts over a long period than large amounts over a short one. Compound interest works in our favor precisely when we start early — even with modest sums.
2. Taking too large a mortgage for an expensive property
There's a big difference between someone who chooses a large mortgage as part of sound financial planning, and someone forced into a large mortgage because they bought a property that stretches their finances to the limit.
In the second case, the high monthly payment leaves no room to save and invest on the side — it simply reflects the high price of the property. Here the high standard of living (the beautiful, spacious home) comes at the expense of financial security and the ability to build wealth for the future. That's not a financial strategy — it's bending the mortgage to fit a consumer choice.