Omni – Borrowing

If a scheme borrows funds from a bank (or other lender), the details of the contract can be stored on the ‘Direct Investments, Borrowing’ screen.

When a scheme borrows from a bank, the mortgage repayments are usually level amounts but the interest is often variable.

Often the bank will calculate interest quarterly, allowing for daily changes in base rate. The payments made each month are deducted from capital but the interest is charged at the end of each quarter to increase the capital owing.

The mortgage repayments will be tracked as they leave the scheme’s current account. However, the interest and capital elements will often not be known at the time that they are made. Omni therefore categorises them as ‘Borrowing Payments’ and does not attempt to identify the capital and interest element of each payment from the current account.

Omni allows 2 options for tracking the value of the mortgage:

Mortgage (Bank) Account

Mortgages can be stored as a negative bank account. When setting up the bank account, the ‘Mortgage account’ box should be ticked (more details in bank accounts). When bank transactions are entered (by clicking the New/Amend button on the Bank Transactions screen), the payment categories that are shown are specific to mortgages. For income, the option is ‘Mortgage Payment’ which is the amount that is transferred from the current account. For expenditure, the options are ‘Interest Charged’ and ‘Mortgage Advance’.

If the bank account is a ‘Mortgage Account’ then the ‘Borrowing Values’ tab will not be shown on the ‘Direct Investments, Borrowing’ screen.

Valuing a Mortgage (or Borrowing)

The balance on the mortgage account at any time is shown in Omni but this is simply the notional value found by deducting the total amount of each repayment from the balance. The interest that would be due to any date is not known and so the ‘balance’ is not the amount that would be needed to clear the mortgage at that date. The balance is only valid on the date that the interest is charged to the account. It could be argued that the accrued interest is not significant and that accruals are not allowed for when preparing investment valuations. However, the interest on a mortgage could well be significant, especially as borrowing can reach 3 times the net asset value of a SIPP (reducing after A day). Investment valuations at dates other than the interest date should be used with care – the user must be satisfied that the approach is correct for BCEs and other official calculations.

Borrowing Values

You may not wish to track and enter all of the payments into and out of the mortgage account. In this situation, the borrowing details should be completed but a bank account should not be created on the ‘Bank, Accounts’ screen.

The ‘Borrowing Values’ tab will be shown on the ‘Direct Investments, Borrowing’ screen. It is intended that the borrowing values are entered regularly, e.g. quarterly. When entering the values (and deciding which dates to use) it is important to bear in mind the principles in the ‘Valuing a Mortgage’ section. It is important that the value stored is consistent with the payments deducted from the current account at the date of the investment valuation.

It is important that both methods are not used for the same loan as this will duplicate the value of the borrowing in the investment valuation.

Switching From Borrowing Values

If past values of a mortgage have been stored under ‘Borrowing Values’ but you decide to change to enter all transactions into a mortgage bank account, the outstanding borrowing should be calculated at a specific date. An entry should be made on the ‘Borrowing Values’ tab for that date with a zero balance. A ‘Mortgage Advance’ transaction should be entered in the Mortgage Bank Account for the full amount of the borrowing outstanding on the specified date. In that way, if an investment valuation is run at a date before the specified date, the value will be picked up from Borrowing Values and if it is run at a date after the specified date then the value will be taken from the Mortgage Bank account.

Overdrawn accounts

However, if a scheme has an overdrawn bank account (rather than a mortgage) where there is no pattern to the repayments and any normal scheme transactions pass through the account, then the Mortgage Account approach should not be used. It should be treated as a normal bank account and the full range of payment types will be available – it will just be shown in the investment valuation as a Deposit Account with a negative balance.

Expected Transactions

Details of the regular transactions to repay the borrowing can be entered on the ‘Repayment Details’ tab. Using the first payment date and the frequency, Omni will generate bank transactions from the scheme’s main bank account or the account selected in the ‘Bank Account Paying Mortgage’ box if different.

If a Mortgage Bank Account has been set up in Omni, the transactions into that account will also be generated.