Repayment methods: how does your money return to the bank?
The repayment method determines how the mortgage principal and interest are spread over the years, so it affects both the monthly payment and the loan's total cost. On this page, we will learn the Spitzer, balloon, and equal-principal methods and understand which may suit your repayment capacity, income stability, and financial plans.
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When taking a mortgageA long-term loan for purchasing a property, with the property serving as collateral for the bank., you choose not only loan tracks and interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower. rates but also the repayment method. The repayment method determines how the principal — the original debt — and interest are repaid over the years. It directly affects your monthly payment and the mortgage's total cost.
The three main repayment methods are:
- Spitzer (שפיצר): The most common method, offering a fixed monthly payment.
- Balloon, or bullet: A temporary solution for specific situations in which a large sum of money is expected only later.
- Equal principalA method in which the principal is repaid in equal installments, so the total payment decreases over time.: A method for anyone who wants to reduce interest and see the debt fall quickly.
How is your monthly payment structured?
A monthly mortgage payment consists of two main parts:
- Principal
- The sum of money you borrowed from the bank.
- Interest
- The payment to the bank for using the money.
1. The Spitzer method: the most common
Under this method, your monthly payment remains fixed, assuming the interest rate and index do not change.
Advantages
- Budget stability and easy planning of family expenses.
Disadvantages
- During the early years, the debt falls very slowly because most of the payment goes toward interest.
2. The balloon, or bullet, method
Under this method, almost none of the debt is repaid during the term; only interest is paid. The full amount of the debt — the balloon — is repaid in one payment at the end of the term.
Advantages
- A very low monthly payment throughout the loan term.
Disadvantages
- Requires a very large sum of money to be available on the day the loan is closed.
This method has two main forms:
Partial balloon versus full balloon
| Feature | Partial balloon | Full balloon |
|---|---|---|
| Repayment method | Interest is paid every month, and the principal is repaid at the end of the term, known as partial grace. | Nothing is paid during the term, and the principal and interest are repaid together at the end of the loan, known as full grace. |
3. Equal principal
Here, you repay a fixed amount of the debt — the principal — every month, with interest added to it. Because the principal balance falls relatively quickly, interest is calculated on a smaller amount over time. The monthly payment therefore starts higher but gradually falls over the years.
Advantages
- The principal falls more quickly, and the mortgage's total cost is lower.
- The monthly payment gradually decreases over the years.
Disadvantages
- The first payments are significantly higher than under the Spitzer methodA repayment method in which the monthly payment is fixed, while its composition (interest versus principal) changes over time. and may weigh on the budget.
A quick look at the differences
Comparing repayment methods
| Method | Description | Advantages | Disadvantages |
|---|---|---|---|
| Spitzer | Fixed monthly payment | Stable financial planning, certainty, and less stress | Relatively high total cost |
| Balloon, or bullet | Partial or full grace | Low monthly payment at the beginning of the loan | Large one-time payment at the end of the grace period; difficult to obtain bank approval |
| Equal principal | Fixed principal payment with changing interest | Relatively low total cost | The monthly payment is not fixed, making budgeting difficult |
The bottom line
No single repayment method suits everyone
The choice depends on several factors:
Important factors to consider:
- Monthly repayment capacityThe maximum monthly amount you can allocate to mortgage repayments without harming your standard of living.
- Income stability
- Future financial plans
- The desire to pay less interest or receive a stable payment
In practice, most mortgages in Israel use the Spitzer method, but in some cases combining it with other methods may be more suitable.
Frequently asked questions
Can repayment methods be combined in one mortgage mix?
Yes. One loan track may use the Spitzer method, while another — such as a bridge loan — may use the balloon method.
Why do banks prefer the Spitzer method?
Because it is considered safer for the borrower due to the fixed payment and generates higher interest income for the bank in the early years.
Does the repayment method affect the mortgage amount I can receive?
Yes. Under equal principal, the initial payment is higher, so the bank may assess your repayment capacity more strictly.
In summary
The repayment method is the quiet engine of your mortgage. Understanding the differences among Spitzer, balloon, and equal principal can help you build a mortgage that suits your financial situation today and your plans for tomorrow.