Categorizing mortgage repayments as transfers (with the interest portion as an expense)

How a mortgage is set up and tracked in PocketSmith can vary from user to user! Check out our Overview guide for information on all our mortgage tracking methods, or continue reading to learn about our repayments as a transfer method 🏠⚡️

Overview

Categorizing mortgage repayments as transfers (with the interest portion as an expense)

Reasons to set up a mortgage in this way

There are a few reasons that you may want to categorize your mortgage repayments as transfers: 

• Accurate forecasting of net worth: If your home loan is included in PocketSmith as a loan account or home loan debt and your mortgage repayments are paid into the loan account or home loan debt, your overall net worth doesn't change. Therefore that movement of money from one account to another (eg. from an everyday account to a loan account) isn't seen as an expense, because what is debited from one account is then credited to another.
• Prevents double-counting your expenses, ie. the principal payment and the interest payment. The interest portion can be categorized as an expense to reflect the true cost 

To accurately represent net worth, it's best to categorize the mortgage repayment into the loan account as a transfer, and then treat the actual interest transactions that are automatically debited from the loan account as the expense - the interest transactions within the mortgage account are what causes a change in your net worth.  

A good way to think about this is similar to how one might treat savings or investments - savings and mortgage payments are actually quite similar! With both of these, money is just being moved from one account to another account and the transfer of savings isn't really considered an expense.

Category set up 

In order to manage your mortgage within PocketSmith in this way, you'll need to create 2 unique categories, for example:

• Mortgage repayments (transfer)
• Mortgage interest (expense)

1. Assign your mortgage repayments to your Mortgage repayments category, and ensure that this is set up as a transfer category.
2. Assign both sides of the transfer to your Mortgage repayments category (for example, the transaction leaving one account, and then that same transaction entering another)
3. Assign the interest transactions that are debited from your mortgage account to the Mortgage interest category

Budget set up

In order for your Net Worth forecast to be accurate, you'll need to set up the following budgets:

• A transfer budget for your Mortgage repayments category
• An expense budget for your Mortgage interest category

1. Create a transfer budget for your Mortgage repayments category.

   This will allow you to track your transferred payments and it will also allow PocketSmith to create an accurate forecast of your future account balances. Check out our user guide:  Creating a transfer budget.

2. In order for your Interest payments to be reflected in your forecast, you'll also need to create an expense budget for your Mortgage Interest category. For detail on how to create a budget see: Creating a new budget.

Updating the expense interest budget periodically:

For the Mortgage Interest category, we recommend regularly updating the budget amount using the calendar page and selecting ' This and future budget events' option when applying any changes to more closely match the actual interest charged for your loan. This way, you can ensure that your forecast remains up-to-date and more accurate.

How this will affect your PocketSmith reports 

By treating your principal Mortgage payments as a transfer, they will not be reflected on the Earning & Spending chart on the Dashboard nor in your overall spending budget at the top of the Budget page. Any Interest transactions will show as an expense.

Users can still create budgets for mortgage payments if they are set up as transfers so that they can be tracked! With a transfer budget set up, PocketSmith will automatically match the credit transaction to the debit transaction (or vice versa) for that budget, which will allow the user to keep track of their mortgage payments, and also allow PocketSmith to be able to create an accurate forecast of their future account balances. Check out our user guide:   Creating a transfer budget.

Viewing repayments as an expense

To view your mortgage repayments as an expense, you can use the Income & Expense report (Reports > Income & Expense) instead of your Budget Summary.

When on your Income & Expense report, you will want to make sure you toggle Include transfers on so they are included in the report, as well as Select multiple accounts, making sure that your mortgage accounts are not selected:

The expense side of the transfer budget set on the Mortgage Repayments category will show as an expense in the report and be included in Total Expense.