Author: Catriona Singfield

With such a wide range of mortgage choices out there, it comes as no surprise that there are a whole raft of ways to make up the payments on each of them, too. And although a low percentage is often the most obvious feature, there’s much more to your mortgage than the interest rate – how it is calculated could be crucial for determining exactly how much you will pay.

For example, if your mortgage is an interest-only one with no payments on your capital, the date your interest is calculated makes no real difference. For other methods, however, that timing could be very important.

On some loans, the building society works out the figure on which repayments are based annually. This means that even when you pay money back over the course of the year, thus reducing the amount you owe, you are still charged as if the total had not changed – until the end of the repayment year. The net result is that you end up paying interest for money you have already paid back!

Because of their attractively low headline rates, the building societies using this annual method are often the ones at the top of the mortgage tables. High street firms such as the Bristol and West, Leeds, Portman, and Alliance and Leicester Building Society offer mortgages at 4.19%. But when you consider that they also calculate interest on these loans annually, the real rate you pay becomes higher. Over the year, the amount you pay works out at 0.13% more, so the total charge is actually 4.32%. Not quite so attractive!

Just to add to the mix, not all companies use the same methods on all of their mortgages. The Portman use a different method entirely, whereas the Alliance and Leicester use the per annum charge for some products, depending on whether you deal with them directly or through a broker. The Bank of Ireland uses another system on their own direct loans, but returns to the annual interest calculation for the Bristol and West, a building society owned by the bank. And to further complicate the situation, many of the smaller building societies – like the Nottingham, Dunfermline and West Bromwich - use an annual rate too, although they are likely to be updating in the future as systems and equipment change.

So what other way can these companies use? The other method of interest calculation is a daily rate. Every time you make a payment, the interest is updated on the same day, and your final balance is updated too.

Here’s an example to illustrate the difference this could make. Take a mortgage of £100,000 with the Portman, with a two-year discount and a headline rate of 4.19%. With annual interest rate calculation, the money you repay is effectively at a cost of 4.32%. Your monthly repayment would be £544.20.

Now take a look at a mortgage offered for the same requirements from the Natwest. This time the rate is worked out daily, and is slightly higher at first glance – 4.29%. But your monthly repayments with this option would only be £538.98.

So which is the best for you? As always, it depends on your individual needs: for an interest only mortgage, the Portman’s annually-calculated scheme would be the most economical.

So why don’t all lenders use the daily system? Some think that existing users on the yearly rate would feel unfairly discriminated against. And being charged interest every day can look daunting at first sight.

There are so many variations of mortgage, with new ones being offered daily. It can be hard to keep up with all the choices available. So we suggest consulting a mortgage broker, who will be able to find a tailor-made deal that fits what you need in all respects, including of course price.

After all, it’s your mortgage, and it’s that final monthly figure you pay that counts!

More Mortgage FAQ’s
More Mortgage Articles

Technocrati Tags[mortgages]