Handling Offset and Redraw Accounts in YNAB | YNAB

Handling Offset and Redraw Accounts in YNAB

G’day!*

I’m Ian, one of the YNAB development team. Nice to meet you!

Jesse has asked me to explain how to use YNAB to handle some mortgage situations that occur frequently here in Australia, but aren’t quite so common in other parts of the world. Specifically, how to deal with mortgage offset accounts and mortgages with redraw facilities. My wife and I bought a house in the Blue Mountains (in New South Wales roughly an hour and a half west of Sydney) about five years ago. Our home loan had an offset account attached to it, and after we refinanced in 2011 we found ourselves instead with a redraw facility as part of our loan. So I’ve dealt with both of these in my own budget and can (hopefully) explain how I’ve dealt with them in the YNAB software. Both of these account types provide a way for you to pay down your mortgage more quickly, while at the same time maintaining access to your money if you really need it (which is handy).

Offset Accounts

Offset accounts are a transaction (“checking” for our US-based friends) account that is linked with a mortgage so that when interest is calculated on the mortgage, the balance of the account is offset against the principal of the loan. This means the higher the balance you have in your transaction account, the less interest you pay. So the goal is to keep that balance as high as you can. The good thing about offset accounts is that they are very easy to manage in YNAB – they are simply a standard checking account. So, you don’t need to do anything differently to how you would normally use YNAB. Build up your category balances for rainy day funds and the like, and just leave that money in the account. If you want to, you can create an “offset funds” budget category, and budget money into that, which means that you will be building up extra padding in your account and as long as you spend according to your categories (and not your balance) your loan interest will decrease. You budget your regular mortgage payments as usual, using a regular budget category.

To represent the actual loan in YNAB, you can add that as an off-budget loan account if you want to see it being paid down over time, in which case your payments are a transfer from the offset account to the mortgage account, categorised using your mortgage payment category (because money is leaving your budget). When you receive your statement, you can add the interest as an outflow from the mortgage account.

If you don’t want to see the mortgage itself in YNAB, it’s even easier – all you need to do is create a mortgage budget category, and make an outflow with that category each time you make a payment. Fair dinkum**, it’s that simple!

Redraw Facilities

Having a redraw facility attached to your loan allows you to pay extra into your home loan and then redraw that money at a later date. This can either work by allowing you to transfer the money back out to another (pre-specified) account, or may allow you to spend directly from the home loan account. Unfortunately, managing redraws in YNAB is slightly more complicated than the ease of offset accounts.

The reason for the complication is because a redraw account is both a budget account and an off-budget account. At the same time. Unfortunately we don’t have anything built into YNAB to handle this sort of craziness, so for now we have to deal with it manually. And that means we need two accounts in YNAB to represent the single real-world account.

The first account is the actual mortgage account, created off-budget, with the starting balance equal to whatever remains on the loan (not including any funds in the redraw portion of the loan account). I’m going to use some easy numbers for examples here, so it’s easier to see what’s going on. In this instance, we’ll say we have a mortgage for $100,000 (I wish my mortgage was only for $100,000, but houses are expensive Down Under***).

The second account is the redraw portion of the loan account. It is created as a checking account, with a starting balance of whatever funds are available to redraw. For this example, we’ll say we have $20,000 extra that we have paid into the loan. This could be from a combination of rainy day funds, extra payments, and using the loan instead of a savings account. Personally, I put the bulk of my pay into this redraw account, and pay my credit card and the other bills from there. At this point, we have two accounts in YNAB representing our home loan. When the two balances are combined, they total $80,000 remaining on the loan, but we can access $20,000 if we want to.

At this point we can actually start spending from the redraw portion, as well as paying down our home loan. My loan provider won’t let me pay the mortgage from the redraw portion, so I have to maintain another transaction account in order to pay off the home loan.

It should look something like this on the sidebar:

When we look at our loan statement, it will say that we have a balance of $80,000, because the two home loan accounts in YNAB are combined in Real Life™. Shown below are a series of transactions as an example of how to represent spending. Payments for the home loan are transfers to the off-budget portion of the loan (again with a category, because money is leaving your budget). Interest on the home loan is added as a standard transaction. All other payments come and go from the redraw portion of the loan.

As you can see, I got paid into the home loan**** and paid for my credit card from the redraw portion of the loan account, as this money hasn’t explicitly been used to pay down the loan. The monthly payment went to the non-redraw portion of the account, and interest was applied there as well, because those are directly applied to the loan itself.

The sidebar now looks like this:

You may have noticed that I had flagged all the home loan transactions with the same colour***** flag. I do this so I can reconcile the account. Reconciling in YNAB only works on a single account, so we have to manually ensure these combined numbers are correct and then we can lock down the individual portions. By giving all transactions in the two home loan accounts the same flag, it makes it easy to filter. So, going with a statement on 4/3/2013******, we can change to All Accounts and set the filter to the following:

At this point we can confirm that the statement date of 4/3/13 and loan balance of $79,600 to pay is correct by looking at the total in the footer. If we are missing a transaction, we can just add it here directly (making sure to flag it the same colour), and if we need to unclear some of the transactions to match the statement, we can confirm the total is still correct by adding “Is: Cleared” to the search filter.

Once we are sure our total matches the statement, we can reconcile the two YNAB accounts separately by making sure every transaction after the statement date is uncleared, and then clicking “Reconcile Account” and entering the statement date. The cleared total is automatically set there, so we can just click “Finish Reconciliation”, and we’re done!

That’s it!

As you can see, it is a little more complicated to handle a redraw account, but after reconciling once or twice, it gets much faster to manage. It takes me considerably less time to reconcile our home loan than it took for me to write up how I manage it.

Thanks for joining me on this little excursion into Australian home loan features and how to manage them in YNAB!

Cheers,

-Ian

*I have to say that because I’m Australian, and it’s written into our constitution that all international communications have to begin with “g’day” on pain of capital punishment.

** This isn’t in our constitution, but I say it here to re-establish my antipodean credentials

*** We never actually say “Down Under” in Australia

**** My pay for March hasn’t cleared yet, but I have a full buffer, so I’m ok

***** There is a “u” in there. “Co-lor” sounds like a B-movie alien invader name

****** That’s March 4th, not April 3rd