Money News
With a myriad of mortgage loans available - each with their different sets of charges - many borrowers remain blissfully unaware about how the interest on their loan is calculated.
As Julia Harris of financial data provider, moneyfacts.co.uk puts it, mortgage lenders - generally speaking - will adopt one of three different frequency periods for charging interest - daily, monthly or annually.
Assuming only one monthly mortgage repayment is made, then daily and monthly interest will equate to the same total charge. This is by far the fairest method, whereby any repayments made will automatically be deducted from the balance, thus only charging interest on the mortgage balance outstanding."However, should the provider only calculate interest on an annual basis, your monthly repayments will not be deducted from the balance for interest purposes.
"So, for the full twelve months interest is charged on the mortgage balance owed at day one, effectively the lender is holding your repayments until the end of the charging year, but will calculate the interest on an ongoing basis," says Harris.
And she adds that the use of annual interest is more common than you may think. Indeed, Moneyfacts.co.uk research has found that 20 lenders - that's 1/6th of all lenders - use an annual interest calculation on some of their products or on their entire product range.
These are: Barnsley BS, Bath BS, Bristol & West, Buckinghamshire BS, Catholic BS, Chorley & District BS, Dunfermline BS, Earl Shilton BS, GHL Group, Giraffe Money, Harpenden BS, Holmesdale BS, Leeds BS, National Counties BS, Nottingham BS, Portman BS, Progressive BS, Shepshed BS, Vernon BS and West Bromwich BS.
Harris notes that annual interest ultimately means that the lender will have an interest free loan from the borrower, and as a result the borrower will be faced with a larger interest bill.
Take for example an average repayment mortgage of £130K over a 25 year term and assuming an interest rate of 5%. The difference between annual and daily interest would be an extra £8.68 per month. Over the term of the mortgage this equates to a whopping £2,604 extra interest paid.
Put another way, repaying an extra £8.68 per month on a daily interest mortgage would knock six months off the repayment term. Another way of looking at it is that it adds the equivalent of 0.10% to your interest rate, says Harris.
02 February 2007 © Moneyextra.com
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