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?

 

Astro_Geo

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    • WordTenor
    • I have the honor to be your obedient servant
    • WordTenor
    • 9 mths ago
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    • Reported - view

    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.

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  • Thanks for your input...

    Sounds logical, although I'd lose a direct view on the total amount of due interest...
    Also, wouldn't you consider the amount of due interest a debt?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 9 mths ago
      • Reported - view

      Astro_Geo The entire mortgage is a debt. The interest is the cost you incur for having the debt.

      Not sure why you need a direct view of the interest, but if you want, you'd just do your mortgage payment as a split transaction, with the interest categorized to an interest category, and the principal categorized to a principal category (and possibly transfered to the mortgage tracking account).

      Of course this requires adjusting the split every month both in your budget and in your transaction, so it's additional work.

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      • Astro_Geo
      • astro_geo
      • 9 mths ago
      • Reported - view

      nolesrule The more I think of it, the more sense it makes 🙂 The amount of monthly principal is not spent, you add it to your equity indeed... 

      I just made the changes accordingly, and needless to say my net value looks a whole lot better now 😄 But it makes sense. The moment you buy the property, your debt and equity cancel each other out. One month later, you're already in plus. Never looked at it this way before...

       

      Of course this requires adjusting the split every month both in your budget and in your transaction, so it's additional work.

      >>> True, but I have the payment table from the bank, it's just a copy/paste.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 9 mths ago
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      Astro_Geo 

      Astro_Geo said:
      True, but I have the payment table from the bank, it's just a copy/paste.

       That works until/unless you make an extra principal payment. 🙂

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      • Astro_Geo
      • astro_geo
      • 9 mths ago
      • Reported - view

      nolesrule 

      That works until/unless you make an extra principal payment. 🙂

      Not in the planning for now. I also believe it's not really a habit around here, bank makes you pay a sort of fine if you do so (because they're missing on interest). 

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  • 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. 😉

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