Mortgage, tracking real estate, and total net value.
I'll try to keep it brief and simple (amounts are fictitious) : let's say I pay 700€/month for mortgage, of which 500€ principal and 200€ interest.
I budget the full 700€ in one budget category 'mortgage'. When I make the monthly payment I enter a split transaction:
- 500€ payment to tracking account 'principal'
- 200€ payment to tracking account 'interest'
(both tracking accounts obviously started with the full due amounts in minus)
Now, I also have a tracking account called "Real Estate Value", to which I add 500€ every month. Reasoning: whenever I pay off 500€ of the principal amount, I 'own' another 500€ of my apartment (the remainder being 'owned' by the bank).
But when I think of it, I seem to add 1000€ monthly to my net value this way, 500€ less debt on the principal tracking account, and 500€ extra value on the real estate tracking account.
But if I would delete the real estate tracking account, I wouldn't know my real net value. If I would sell the apartment for the same price as I bought it, the part of the principal that I paid off would stay in my pocket so I consider it part of my net value.
Both option seems wrong, what is the correct way to do this?
You need a tracking account only for the mortgage. Its starting balance should be the amount of mortgage left to be repaid. Each month, your split categorizes 200€ to tyour mortgage category (because that money just disappears) and 500€ to the mortgage for principal reduction. No need for an account for interest; it’s better thought of as the real cost of the mortgage.
You keep a second tracking account which is your home’s value. The difference between the mortgage value and your home value is your equity, and when you look at your overall net worth, the two accounts will offset each other to show you this.
Another option is to put the combined principle and total remaining interest (accumulated over the rests of the term) as the "mortgage" tracking account balance. Transfer the entire 700€ to that account categorized as Mortgage in a normal (non-split) transaction.
(If you ever do make an extra payment, you can update the remaining balance (including revised interest) at that time.)
If you mentally lump principal and interest together, this is probably closer to that mental picture. Some people would be motivated to see the "full" picture, but others would be dismayed. Choose wisely. 😉