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 two ways in which the lenders calculate the interest on the mortgage and deciding which will be of greater benefit depends on the way you plan to pay back the loan. Monthly rest and annual review mortgages are two popular types of mortgage and, it must be said, are both relatively self explanatory, as we will see in the next couple of paragraphs.
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.
However, you must assess whether or not the debt is indeed actually being reduced. If the mortgage that you have is an interest only mortgage, your monthly payments are only serving to pay off the interest, so the actual debt itself is not actual being reduced. You are not benefiting from a monthly rest mortgage. It is easy to think that a mortgage repayment method that is calculated on a daily basis is beneficial, particularly taking in to account the fluctuation in interest rates, but this makes no sense if you have an interest only mortgage. The only way to benefit is if you make a capital repayment. By doing this, and subsequently reducing the amount of the capital loan outstanding, you will benefit from the reduced interest on your loan straight away.
The way the annual review mortgage works is that the lender would work out the amount of interest to be applied to the loan at the start of the year and add it to the loan amount there and then. The interest is therefore a lump sum which will not vary throughout the year. This is all well and good if you are making interest only repayments on your mortgage where the interest is not affected but if you are paying off any of the capital on the loan you will lose out because although your debt is being reduced, the interest for the year still remains the same.
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 refinancing mortgage obvious benefits to the lenders.
It has to be said that most lenders nowadays do operate monthly rest mortgages and most of them do calculate their mortgages on a daily basis as the market has called for this over many years. This level of transparency has been a fundamental requirement for treating customers fairly as annual review for refinancing mortgage with repayment mortgages does not represent very good value for money.
The thing to decide when taking out your mortgage is whether you are happy to solely cover the interest on your loan or whether you would also like to chip away at the loan as well. If you are happy just to cover the interest then choosing between monthly rest and annual review has no real consequence but if you want to pay off the capital loan as well seek out the best possible monthly rest deal with interest calculated on a daily basis.
Mortgage Advice from qualified Independent Mortgage Advisors guidance information and free to use mortgage calculators please visit Mortgage Route.
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