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The aim of this article is to set out the difference between annual review and monthly rest mortgages with a view to deciding which would best suit your financial situation. As we shall see, the main difference is the way in which lenders assess the interest to be charged on the loan.

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.

Monthly rest is were the lenders calculates interest either monthly or daily and applies it to the particular debt again either monthly or daily. This has its obvious benefits, if the debt is being repaid any payments that are made towards the debt and as such reducing it will reap the benefit straight away from lower interest costs.

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.

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.

The annual review mortgage would have been the most common type of mortgage among lenders up until five years ago. The reason for this was that the lender only had to calculate the interest on the mortgage once for the whole year and he could be safe in the knowledge that no matter what happened to the actual amount of debt, the interest made on the initial amount was already paid to him.

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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Tags: Mortgages