Setting up savings categories within Line of Credit : Personal Finance

Thanks for your quick replies, I am super keen to get set up and started!

I am from Australia and had no idea that we did things any different from other countries!

When you take a mortgage in Australia they either set up the mortgage as an "off set account" where if you have $100k mortgage, but $10k in a savings account you will only pay the bank interest on $90k. In this set up you make regular loan payments to the loan and the balance decrease over the term of the loan (usually 30years). If you default on this loan the bank would legally be able to acquire all your available savings before they reposes your house.

The other main mortgage set up is a line of credit account (called various names by the various financial institutions). So say you apply for a limit of $200k. As long as you have funds available up to that limit you can draw any amount on any given day for any purpose. The idea of paying off this style loan is that you put all of your available income and savings into this account and pay the least amount of daily interest possible. The bank provides you with a credit card which you make all purchases on and then is paid in full at the end of each month from the home loan. This loan is more expensive because you do have the full limit of the LOC available.

We have used this LOC style of loan since we purchased our first home. We borrowed $300k in 2003 and had paid it out in its entirety 2008 (can't remember exactly). At that time our family had expanded and we needed a bigger home. So we borrowed a further $220k in 2009 which is now down to $90k. So we are obviously the personality type that this type of loan is suited to. We like the idea of the LOC because it available to invest if we chose to (although we want to pay it out entirely first).

So my problem is that my 'savings' really are in my LOC! I understand that means that we need to see a positive balance before all of the savings are accounted for. To date I have been keeping track in an excel spreadsheet (even calculating and adding their interest!). All of our other budgeted savings are also sitting in the LOC. So for insurance, maintenance, gifts, etc, etc. Again I have been tracking ALL of this in a spreadsheet!! Then to see our financial position I would add all of the 'savings' in the tracker and add that total to the current LOC balance (as if I took all of those savings out and put them into a separate savings account).

And I understand what you mean about it being 'not safe' having savings in a debt facility, but in Australia if you default on your loan they take every cent you own before they take your house anyway (you are also expected to liquidate all other assets). So it really is no safer to have savings in a separate account.

Does that make any more sense with how I will need to set up my accounts?

Thanks for your help!!!!!

Source: http://www.youneedabudget.com/forum/personal-finance-f9/setting-savings-categories-within-line-credit-t19812.html

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