In the fixed, CPI-linked track (ק"צ), the interest rate does not change for the whole period, but the principal is linked to the Consumer Price Index. In every month the index rises, the outstanding balance rises too, and with it the monthly payment.
Why does the rate look low?
Because the bank is protected from inflation through the linkage. That is why the linked fixed rate is usually lower than the non-linked fixed rate. But the right comparison is: linked rate + expected inflation versus non-linked rate.
A simple example
A loan of NIS 500,000 in the linked fixed track. If the index rises by 2.5% in a year, the principal "inflates" by about NIS 12,500 that year, even if you made every payment on time. This is why people discover after a few years that they owe almost the same amount they borrowed.
Full explanation: What is the CPI?.
Advantages
- A known interest rate for the whole period.
- A relatively low starting payment.
Disadvantages
- The principal grows with inflation.
- A capitalization fee on early repayment if market rates have fallen. Early repayment fees
- Over long periods the linkage adds up to large sums.
When does it fit?
The linked fixed track can be part of a mix as a fixed component that lowers the starting payment, mainly when low inflation is expected. It is usually better kept for short-to-medium periods rather than spread over 30 years.