annual review or monthly rest mortgages- what is the difference?
This article will go some way to explaining the terms annual review and monthly rest and explain the benefits between the two ways in which lenders calculate interest and as a consequence which is better for you the borrower in particular situations.
There are essentially two ways in which lenders can calculate interest and whilst one way may be beneficial to some borrowers another may or may not be. You may have heard in all the mortgage terminology both on the internet and in the real world the terms Monthly rest and Annual review. It has to be said that they do what they say on the tin.
With a monthly rest mortgage the interest is calculated on either a daily or monthly basis and then applied to the loan accordingly. The most obvious benefit of this type of mortgage would be if you are repaying the debt on an ongoing basis. That is to say, the more you pay back on the loan, the lower the interest will be on a daily or monthly basis.
That said, the key thing here is whether or not the debt is actually being repaid because is you have an interest only mortgage it is of no consequence whatsoever if the interest is calculated daily weekly monthly or annually as the debt does not change so there is no benefit to derive. A lot of people set a lot of store in having a mortgage that is calculated daily but if it is interest only they do not stand to benefit in any way. The only time they will is if they make a capital repayment, if this does happen and they are on a daily interest calculation then they will reap the benefit of the reduced loan amount immediately.
Annual review interest is a bit of a throw back of the past for mortgages. The lender would look at the size of the debt at the beginning of the year, they would work out what level of interest they were going to charge on it and apply that debit there and then. This meant that for the whole year you were essentially paying of the full years interest. The downside to this is if you repaid some of the debt by lump sum or just standard repayments you got no benefit for it as the interest had already been worked out in advance.
Most lenders up until about 5 years ago used to work out the interest repayments on an annual review basis. They only had to make one calculation a year for each mortgage which would cover the rest of the year. The interest would be paid off no matter how the market fluctuated as the amount due had already been worked out, so there were obvious benefits to the lenders.
Due to the changes in the demands of the markets over the last number of years lenders are now operating monthly rest mortgages and calculating the interest on a daily basis. Customers now find themselves on a more level playing surface as they are given the choice of either paying only the interest of the loan at a favorable yearly rate or paying of the capital as well and benefiting from the daily and monthly changes in the interest that this method yields.
So when choosing your mortgage if you are electing to go the interest only route and you do not intend to make any capital repayments don’t worry too much whether you have annual review or monthly rest. However if you are setting up a repayment mortgage or if you are intending to make additional capital payments to your mortgage you had better try and ensure you have a monthly rest deal preferably with interest calculated on a daily basis for the maximum benefit.
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