Buying an apartment: withdraw from the advanced training fund or just take a loan against it?

When interest rates in the economy are at record levels and inflation is eroding savings, the economic reality changes. In a new series of columns, we will try to simplify complex financial topics and provide essential information and practical tips for money management.

The author of the columns is Tomer Varon, host of the podcast "The Money of Life Itself", author of the book "How to Take a Mortgage" and financial advisor at RiseUp.

Maya and Eitan were about to buy an apartment in a somewhat large deal, and were debating whether to use their liquid advanced training fund. There were 200,000 shekels in the fund, and they were thinking of withdrawing 150,000 from it. They could withdraw the amount because the fund is liquid, and thus reduce the mortgage; they could leave the fund and take a larger mortgage, or take a loan against the fund.

All three options bring the same 150,000 shekels to the deal, but build a different balance sheet for the family. To make order, the dilemma must be broken down into two big decisions, which will be made based on liquidity, flexibility, cash flow, and interest rates. It is important to say that despite the popularity of the advanced training fund, there is no "black and white" here and there is no one decision that is always correct.

The first decision: withdraw the fund

Even before checking what interest rate is offered on a loan, it is worth asking at all what the role of the advanced training fund is in our investment portfolio, and then check what the mortgage amount and monthly payment will be, if we withdraw and if we leave it. And no less important - how much liquid money will remain on the day after the purchase? Will we be able to continue saving monthly, or will any unexpected expense or trip we want to take cause us headaches?

If, for example, the answer is that without withdrawing the fund there is not enough equity, or that without it the payment comes out too heavy, there is a good chance that the right question is not what to do with the fund, but whether the price of the apartment suits us at all.

Therefore, in such a situation, before splitting hairs about the tax-exempt yield, it is worth checking what an apartment that is 100,000–150,000 shekels cheaper will do to the payment, liquidity, and ability to continue investing. True, sometimes this means a different deal, but the difference is not only in the price of the apartment, but in the economic life that will be after the mortgage, and this is actually the most important question here.

It is important to say: there is no claim here that it is forbidden to use an advanced training fund to purchase an apartment. In the end, you don't go to the grocery store with a tax exemption, and people save to use the money exactly in the big moments of life, but there is a big difference between a fund that serves as part of reasonable planning and a fund without which the deal does not stand on its feet (and we haven't even talked about the fact that withdrawal means opening a new fund, which will usually not be liquid for six years).

If the deal stands even without withdrawing the fund and we are debating, there is another parameter that must be taken into account - the principle of reversibility. After all, if we didn't withdraw the money, the fund continues to work in a tax-exempt capital gains instrument (up to the ceiling), and we enjoy more flexibility. The fact that we didn't withdraw today doesn't mean anything about six months or a year from now, if we decide that we want or need to reduce the debt and lower the monthly payment - it will be possible. True, there may be early repayment fees, but that too can be planned.

The point is that in the opposite direction it doesn't really work. If we withdrew the fund and regretted it, it is harder and more expensive to take out from the bank and the walls the amount we withdrew, and certainly it is impossible to return it to the same fund that enjoys tax benefits. This is the degree of reversibility of the decision, and it has great value in my eyes, but the basic condition is that the cash flow allows it, and again we return to the budget of the deal.

Second decision: leave it. Where will the money come from?

Maya and Eitan can leave the money and take a loan against the fund. The explanation was familiar: it's a pity to withdraw a tax-exempt fund, especially if its yield will be higher than the interest on the loan. Now, with the drop in interest rates, this option becomes more logical, and is on the face of it the winning option. But comparing interest rates alone misses the cash flow and the debt structure.

Let's assume for the sake of comparison that the interest rate in all options is 4.5% (prime minus half a percent as of the time of writing these lines). A regular loan in the advanced training fund of 150,000 shekels for seven years will generate a payment of about 2,085 shekels per month. If the period is five years, the payment is already approaching 2,800 shekels. Maybe the interest is good, but the loan is short, so it sits hard on the cash flow. Does this suit us at all? (And if so, maybe it's possible to build a completely different mortgage and shorten it).

Here usually enters the partial balloon option. You take a loan, but instead of paying it back normally, you pay only the interest every month, and at the end of the period you have to pay back the entire principal at once. A balloon generates a monthly payment of about 560 shekels in our example. This is even less than increasing the mortgage by 150,000 shekels, which will add about 835 shekels per month (25 years). On paper, the balloon looks like the most comfortable option.

And there are cases where this is indeed the case, but to decide you need to look at the full picture, because the monthly payment tells only part of the story. Like for example the difference that in a mortgage the debt goes down every month, even if slowly. After seven years, about 123,000 will remain out of those 150,000 shekels, and in the partial balloon the original amount will remain. Or like for example, that a loan against the advanced training fund will not allow us to move the fund to another body if we want, and sometimes also limits investment tracks.

"At most we'll withdraw the advanced training fund?"

The question is not only the 560 shekels per month, but also where the 150,000 shekels will come from at the end of the loan. If an apartment sale is expected or a relatively certain amount will be received, the balloon can be a real bridge. If the plan is "at most we'll withdraw the advanced training fund then", then maybe we didn't really avoid the withdrawal, we postponed it, and took the risk that the market will be at an uncomfortable point at the time of repayment.

Increasing the mortgage, on the other hand, does not put an hourglass on another five or seven years but it is also not a magic solution. The payment is relatively low, mainly because the debt is spread over 25 years and over time we will pay quite a bit of money for it. There are periods when the question of our financing ratio also has an impact, and still, in many cases increasing the mortgage will be preferable to a loan against the advanced training fund in terms of cash flow and overall flexibility.

Bottom line

The order of the decision here is the most important. Often we tend to focus on the micro at the expense of the macro, and the macro of life is to check first of all if the price of the apartment is suitable at all - in terms of total debt, payment, and the liquidity that will remain. Then you can compare the debt interest to the yield and make assumptions while managing risks that will suit the family's preferences.

An advanced training fund is not sacred. There are families for whom the main desire is to reduce the debt, and that's fine. But if you want to maintain liquidity even after the purchase and leave capital invested, the advanced training fund will usually be the last money in the hierarchy of withdrawals.

In such cases, it can remain alongside the purchase of the apartment, as long as the deal budget truly allows it.