EVERYTHING YOU WANTED (AND YOU MUST) KNOW ABOUT SPITZER!

 

One of the most annoying concepts in the mortgage world is the Spitzer board, which I think has two annoying things:

  1. His name – could have found a much nicer name in my opinion …
  2. His method of calculation – which is very much in favor of the bank and not in favor of the customer

In the past I’ve written a bit about the subject, but I feel it’s a good time to analyze it a little more deeply in favor of those who take a mortgage at this time.

In a few simple words, I will explain that the Spitzer method is the method by which the loan repayment is calculated – its calculation is somewhat complex (and annoying), but it is important for me to get two main things from this post:

  1. That you understand how the method is calculated “in a big way” and perhaps you will look at other alternatives
  2. That you understand how the loan period significantly affects your return (which is actually due to the method itself)

So what is the Spitzer board?

So what is the Spitzer board?

When you borrow money from the bank, you are supposed to repay a certain amount each month.

Let’s assume that you have to pay the bank 100 NIS for 10 days at a 10% interest rate. In practice, you are supposed to repay the principal (NIS 100) plus interest (NIS 10, which is 10% of NIS 100).

Since the loan was given for 10 days, you are supposed to return NIS 11 each day to the bank.

The first day came and you came to the bank with NIS 11, and the natural and normal thing that had to be done was for the bank to take NIS 10 for the fund and NIS 1 for the interest rate.

After five days you were supposed to pay back NIS 55, which was supposed to be returned to the bank NIS 50 for the fund and NIS 5 for the interest rate,

a day

payment

Foundation

interest

Balance of principal

1

11 NIS

10

1

90

2

11 NIS

10

1

80

3

11 NIS

10

1

70

4

11 NIS

10

1

60

5

11 NIS

10

1

50

So that’s it, it does not work that way.

In the Spitzer method, you pay the bank NIS 11 each day, but the distribution between the principal and interest is different, and it tends in favor of the bank.

For example, from NIS 11 to NIS 9, for example, they were channeled to a fund, and NIS 2 was redirected to interest. In fact, the table should look like this:

a day

payment

Foundation

interest

Balance of principal

1

11 NIS

8

3

92

2

11 NIS

8.5

2.5

83.5

3

11 NIS

9

2

74.5

4

11 NIS

9.5

1.5

65

5

11 NIS

10

1

55

Why is it really calculated this way and why is not it in our favor?

Why is it really calculated this way and why is not it in our favor?

Please note what happens after 5 days, instead of having to pay the bank “only” 50 NIS (as in the first table), we actually owe him 55 NIS and instead of the bank charging interest for these five days of NIS 5 he charged interest In the amount of 10 NIS (Needless to say that this is an example only and is not strictly accurate, but only intended to illustrate the method).

What I really want to say is that the bank initially takes from the repayment amount first of all a relatively high proportion of interest and a small proportion of the principal.

It is good for the bank and bad for us for several reasons:

  1. The height of the fund drops slowly – and then we actually pay more interest (because it is always calculated on the total remaining fund)
  2. Early repayment – if we want to repay the mortgage ahead of time, then basically the bank has already “earned” its interest rate in the first period of the loan and we will remain a larger fund to repay (remember, when we repay the mortgage, we are supposed to pay the remaining principal and not the interest And thus the Bank will prefer to charge the interest rate at the outset).

Do you understand how the method works? Beauty, that’s good! Let’s continue …

The Spitzer Effect of Years

The Spitzer Effect of Years

It is very important that you know that the longer the loan, the more the method will work against you. When you take a loan for 30 years you pay 70% of the monthly interest payment and 30% of the loan. % For interest and 57% for the fund.

I present to you in the table how the distribution between the interest rate and the fund is made over a period of 30 years:

Year

Yarden Keren

Payment for a fund

Payment for interest

0

1,000,000

30%

70%

1

982,390

31%

sixty nine%

2

964,062

33%

67%

3

944,987

34%

66%

4

925,136

35%

65%

5

904,475

37%

63%

6

882,973

38%

62%

7

860,595

40%

60%

8

837,305

42%

58%

9

813,066

43%

57%

10

787,840

45%

55%

11

761,585

47%

53%

12

734,262

49%

51%

13

705,825

51%

49%

14

676,229

53%

47%

15

645,428

55%

45%

16

613,372

57%

43%

17

580,010

60%

40%

18

545,288

62%

38%

19

509,152

64%

36%

20

471,544

67%

33%

21

432,403

70%

30%

22

391,668

73%

27%

23

349,274

seventy six%

24%

24

305,152

79%

21%

25

259,232

82%

18%

26

211,442

85%

15%

27

161,704

89%

11%

28

109,940

92%

8%

29

56,068

96%

4%

30

4,758

100%

0%

And another little sharpening

The ratio between the payment of the principal and the interest derives solely from the years and not from the duration of the loan.

In other words, if you took a loan for 30 years, the ratio would be 70% in favor of the interest rate and 30% in favor of the fund, and that’s only because you took the loan for 30 years and not because it is the first year of the mortgage repayment.

If, for example, you take a loan for 25 years, then the ratio will be 65% in favor of the interest rate – 35% in favor of the fund.

It is important to understand that the myth says that “the more you progress in the life of the loan the better your situation” – the myth is true (because my situation really improves and I return more than the fund as the years pass), but that does not mean that in any loan period I will pay straight 70% for the interest rate – and 30% for the fund, but it depends only on the number of years I took.

In conclusion,
I have no doubt that it is annoying and not so understandable. I am less interested in explaining how the method works in its mathematical / accounting / financing sense, but to show you the matter in a big way, and thereby explain why you should shorten the mortgage.

I hope to write in the next post a little about another method of calculation called “Shona Fund” and will discuss its characteristics and its comparison to the Spitzer board.

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