When it comes to offset accounts, there are two types of people in the world: those who have an offset account and those who are about to google the term because they’ve never heard those words put together before.
Depending on what country you live in, offset accounts come in a variety of flavors. Australians and Canadians have “all-in-one” mortgages, in the UK it’s called authorized overdraft, and in the US, it’s a home equity line of credit (HELOC) or velocity banking.
How Do Offset Accounts Work?
Here’s how it typically works: you’ve got a mortgage. With that mortgage, you set up a line of credit and treat this as your main checking account. You direct deposit your entire paycheck into this account and treat it just like a spending account. In theory, this setup brings down the principal balance on your mortgage (thus reducing the money you pay in interest). If everything goes as planned, each month you’ll owe a little less on the total balance. However, that account is always negative until you pay it off, so it is technically a negative balance spending account.
Using Offset Accounts in YNAB
Now let’s bring this concept over to YNAB. As you can imagine, this gets tricky when your main spending account is always negative. Your YNAB budget is designed to work with the money you have on hand now.
If you’re working with this type of account, remember that YNAB’s goal is to help you get back to positive and working with the cash you have on hand—because that’s when your financial immune system is strongest.
So can you use an offset account in YNAB?
The short answer is yes, but we don’t recommend it.
We’ll explain our recommendation in a sec, but for those of you who have an offset account and want to use it in YNAB: you can. Setting up negative balance spending accounts does require a few more steps to set up (and one of our amazing support specialists will guide you through it).
Why We Don’t Recommend Offset Accounts
Back to our recommendation: At the heart of it, we want you to feel secure and gain total control of your finances—and that means using cash you have on hand, or positive balance spending accounts. There are some potential pitfalls of off-budget accounts that prevent you from having total control. Consider this: banks wouldn’t offer these accounts if it didn’t benefit them. Make sure you’re aware of the risks and the fine print of the product your bank is offering.
- Possible Foreclosure. When a lender grants a home equity line of credit, your home is secured as collateral. So, if you default on a HELOC, you’re might be looking at losing your home.
- Could Lengthen Debt Payoff. This type of account has the potential to lengthen, rather than shorten, the time to debt payoff. Even if you’re vigilant in spending less than you earn, you’ll need to make sure that the loan or line of credit balance is steadily dropping. (Read that fine print. Read it twice!)
- Your Cash Could Be Frozen. This set up—specifically in the US—can come with a risk that some of your available cash/savings could disappear. If you take your $20k New Car Fund and park it in your HELOC, you’re giving your money two jobs: keep my HELOC balance down and fund my new car. But in the US, most banks reserve the right to freeze your line of credit. If they do that, your $20k just disappeared into your HELOC balance.
Of course, we realize you may not be able to stop using this account type—it may just be a fact of your financial reality right now. If you have an offset account of any sort, reach out to YNAB Customer Support—we can help you use YNAB with this setup and get you moving towards total control over your money.
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