Mortgage Planning During a Financially Strained Period
How to meet your mortgage payments during stressful times
A home purchase doesn't always come along at the right moment. You can't know when the chance to buy will knock on your door. And while you can't always control the timing of the purchase, you can control how you tailor the mortgage to your needs and financial situation.
This article covers approaches to mortgage planning when you face a short, temporary struggle to meet the payments at the start of the loan.
Reasons for difficulty in making mortgage payments
- Buying a property under construction while still paying both rent and mortgage
- Low income due to professional training or academic studies
- Significant additional obligations and loans
- An expected drop in income after moving into the property (childbirth, parenthood, low-earning work)
Summary of the methods
| Method of transferring mortgage funds | What actually happens | Advantages | Disadvantages |
|---|---|---|---|
| Transfer all the money now | We transfer all the money and immediately begin paying the full mortgage | We save the Construction Input Price Index (CIPI) increase, lock in current interest rates, and finish the mortgage payments earlier | We pay the full mortgage right from the start. Are we able to pay it now? |
| Transfer all the money now and take a grace period on some of the loans | We transfer all the money to the seller and immediately begin paying the full mortgage with reduced monthly payments (interest only) | We save the CIPI increase, lock in rates, and finish the mortgage payments earlier. The monthly payment is lower | On the loans in the mortgage mixture that are in the grace period — we pay only interest each month without reducing the principal. Once the grace period ends, our monthly payment will rise. |
| Take the mortgage in installments | We transfer the money to the seller at different times. The monthly payment is low — according to the proportional share of the mortgage that has been transferred relative to the total mortgage. | The monthly payment grows gradually (at the pace of fund transfers to the seller) | We do not save the CIPI increase, we do not lock in rates, and we will finish the mortgage later |
| Pay the money in installments and take a grace period | We transfer the money to the seller at different times and with a grace-period loan, the monthly payment grows very slowly | The lowest monthly payment. | We do not save the CIPI increase, we do not lock in rates, we will finish the mortgage later, and on the loans in the grace period — we pay interest without reducing the principal |
Payment Strategy Comparison — by Parameter
Scale 1–5: higher score = better
The key to figuring out the right course of action is calculating your current cash flow and estimating your future cash flow. Just as in a business, you can't make the right call on a major obligation without a complete handle on your family's cash flow.
To make this concrete and a bit more practical, we'll use a running example. In it, we'll follow a family buying their first home, with the following details:
- Capital requirements: We are buying a property worth 1,350,000 NIS and we need a mortgage of 1,000,000 NIS.
- Current capital: We currently have 30,000 NIS in our current account at the bank.
- Current cash flow and situation: Today we save 4,000 NIS each month. That is, the difference between total income and total expenses is 4,000 NIS per month. This is the family's cash flow.
- Future cash flow and situation: In two years, when construction of the property is completed, rent payments on the property the family currently lives in will stop, freeing up 4,000 NIS. On the other hand, we plan to grow the family, and expenses related to raising children are expected to rise by 2,500 NIS per month. In other words, our future cash flow will grow by 1,500 NIS.
Implications for choosing the monthly payment
Based on the example above, let's see how the choice of monthly payment will affect the family's cash flow:
- Setting mortgage repayments at 4,000 NIS will zero out the family's monthly saving capacity and bring cash-flow balance (note: we also need to factor in the monthly cost of life insurance).
- If we choose a monthly payment above 4,000 NIS, we will be eating into the existing capital — which stands at 30,000 NIS. The family will be in a cash-flow deficit, but the mortgage will be shorter and cheaper.
- If the mortgage repayments are below 4,000 NIS, the family will continue to save a small amount each month. The family will have a cash-flow surplus, but the mortgage will be longer and more expensive.
Given this example — how do we adapt the payment schedules to our situation?
If possible — transfer all the money
Let's start with the easiest, simplest scenario: one where we transfer all the mortgage funds to the seller. It's worth considering this approach in the following situations:
- If our monthly payment leaves us with a cash-flow surplus.In the running example above, any monthly payment below 4,000 NIS.
- We can choose a higher payment that puts us in a temporary cash-flow deficit, intending to cover that deficit from our accumulated savings without going into overdraft.In the running example above, this would be, say, a monthly payment of 5,500 NIS. Such a payment would create a monthly deficit of 1,500 NIS. Since the family has 30,000 NIS in its current account, it can keep this up for twenty months — before going into overdraft.
- Saving the Construction Input Price Index (CIPI) increase: If the price of our property is linked to the CIPI, we can reduce the price increases that result from index growth. When the CIPI, which is updated every month, rises — so does the total amount of your debt to the seller. For example, if the outstanding debt to the seller stands at 1,000,000 NIS and the index rose by 0.5%, the debt grows by 5,000 NIS and will stand at 1,005,000 NIS.
Note: In June 2022 a law was enacted limiting exposure to the CIPI. Only 40% of the property price is linked to the Consumer Price Index (CPI). - Locking in mortgage interest rates: If we're in a period when interest rates are particularly low, transferring the full amount now lets us lock in those low rates. If we wait and transfer the money a year from now, we'll be at the mercy of whatever rates prevail then.Please note
This isn't always true. You should re-check the current mortgage rates each time, and weigh locking in rates against waiting.
- The most important advantage, in our view: We start paying the mortgage earlier, so we finish it earlier. If, for example, you're thirty and took out a 30-year mortgage, it ends at age 60. Delay it by two years and the end date moves to 62. At first glance there's no difference — two years here or there. But in practice, right now you have certainty about your health, your ability to work, and so on. At 62, there's no guarantee you'll be in good health, employed, or free of obligations. If shocks come later, it's far better to face them without a mortgage.
- Setting the monthly payment based only on your current cash flow can leave you with a payment that's too low and a mortgage that's longer and more expensive than it needs to be.Look at the future cash flow in the running example: it's expected to grow by 1,500 NIS. So setting a higher monthly payment — based on that expected growth — would let us shorten the mortgage by years and lower its cost.
- If you expect interest rates to fall, taking out the mortgage now means locking in high rates.
If the cash flow does not allow it — options for managing the mortgage
What are our financing options if we currently can't meet our mortgage repayments without slipping into a cash-flow deficit? There are three main ways to handle this challenge.
Option one: transfer all the money to the seller — and take the whole mortgage, or part of it, with a grace period
You can transfer all the mortgage funds to the seller. By building grace-period loans into the mortgage mixture, we start out paying a low monthly payment. At the end of the grace period (which we'll plan to wrap up when the tough financial stretch is over), the payment automatically steps up to a higher one suited to our needs.
The size of the payment during the grace period is ours to decide. We choose which loans in the mortgage mixture get a grace period and which don't.
- By transferring the full payments to the contractor, we've avoided the growth in our outstanding debt that comes from its linkage to the CIPI (provided the property price in the purchase agreement is in fact linked to the CIPI).
- By transferring the money now, we've locked in the rates we were offered.
- You can choose a higher monthly payment — one you can't meet now but will be able to later. A payment like that lets you shorten the mortgage and cut its cost.
During the grace period, the loans we placed in it are loans whose principal doesn't go down. So we pay the interest on them every month while the debt to the bank stays exactly the same. It's frustrating.
Since grace-period loans are expensive, we should aim to use them sparingly. We want to find the smallest amount we can allocate to the grace-period track that still lets us pay a comfortable monthly payment during the grace period, and then pay the mortgage in full afterward at a payment we can sustain.
The following calculator lets you plan the allocation between grace-period loans and regular loans (optimally).
How to use the calculator
- Enter your mortgage details — the mortgage amount, the annual interest rate, and the desired grace-period length.
- Set the payment during the grace period— how much do you want to pay per month in the first period? The lower the amount, the more money will be allocated to grace-period loans.
- Set the payment after the grace period— how much do you want to pay once the grace period ends? The higher the amount, the shorter the loan term will be.
- Get the result — the calculator will display the exact breakdown: how much to allocate to grace-period loans, how much to regular loans, and what the total loan duration will be.
Loan Allocation Calculator — Grace-Period vs. Standard Loans
Option two: paying the seller in installments — how much do we transfer and from which tracks?
If our situation is tougher still, and even a grace period on every part of the mortgage mixture strains our cash flow, we can pay the seller in installments. This is only an option, of course, if the purchase agreement with the seller allows it.
How does it work in practice? Say the payment schedule to the seller requires us to transfer 25% of the outstanding debt every three months. With each installment, we're free to choose which loans we draw on to pay the seller. The constraints we have to respect are Bank of Israel rules — mainly the limits on variable-rate loans.
There is no need to choose or adjust the number of tracks in the mortgage mixture to match the payment schedule.
First strategy for transferring mortgage funds in installments — minimizing the monthly payment
We want to ease our cash-flow burden as much as possible — that's the whole goal as we try to get through the coming period. That means transferring more money while keeping the monthly payment low. You can do this by drawing funds from the longest loans in the mortgage mixture, since those usually carry the lowest monthly payment. Just note that at every step you have to meet the Bank of Israel requirements — specifically, that at least 33% of the amount drawn down sits in a fixed-rate loan track.
Second strategy for transferring mortgage funds — locking in the interest rates
Let's say we're in a period when interest rates are at rock bottom and we have no doubt things won't stay that way. We'll want to lock in and hold onto the rates we've been offered. Important to know: funds you haven't yet transferred to the seller are funds whose rates you haven't yet locked in.
The prime-linked rate can't be locked in, so we'll want to transfer it last. Fixed and variable rates can be locked in, so we'll want to transfer those first.
Option three: paying the seller in installments with a grace period
This option combines the two previous ones. We both transfer the money in installments and take those installments with a grace period. It's the last resort for someone in an emergency who has to cut the monthly payment to the absolute minimum. Here too, you can plan which tracks to draw the money from.
Keep in mind that, because we draw the money in portions, we may find ourselves two years from now with a mortgage carrying interest rates completely different from the ones we agreed with the bank.
Summary
Tailoring the monthly payments to your household's needs is one of the first and most important steps in the mortgage planning process. It does take thorough preparation — calculating your current cash flow and estimating the changes expected in your household's income and expenses. But the effort pays off: choosing the financing plan that's right for you.
Good luck!