The difference between annual review and monthly rest mortgages
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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.
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.
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.
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.
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.
Article Source: Articlelogy.com
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