annual review vs monthly rest mortgage...what is the difference?
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by: ChrisClare
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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.
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.
The crucial point here is whether or not the actual debt is being paid off. If you have an interest only mortgage then you will not benefit in any way from the interest being calculated on a daily or monthly basis because you will not be paying off any of the actual loan and therefore the value of the interest on the loan will remain the same. The only way that you can benefit from the interest being calculated on a daily or monthly basis is if you are making payments back on the actual capital borrowed. As you pay back on the actual capital, the amount you have borrowed will gradually decrease and it therefore goes that the daily or monthly interest calculations will be lower and lower.
Annual review used to be the normal form of mortgage repayment which has recently become less common. The lender looks at the debt payable for the following 12 months. They then work out the amount of interest payable on that amount, again for the full 12 months. The interest is applied to the full amount so that you can see at the start of the year how much you will have to pay in interest for the next 12 months. However, this means that if you pay the interest debt off in a lump sum or in individual set repayments you receive no benefit whatsoever if the interest rates change in your favour over the next year.
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.
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 people 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.
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