annual review or monthly rest mortgages- what is the difference?
There are two terms currently being used with regards to mortgages: annual review and monthly rest. In this article we will aim to identify the main differences between the two. We will also show the benefits of each so that you may find the best suited to your personal needs.
There are two ways in which the lenders calculate the interest on the mortgage and deciding which will be of greater benefit depends on the way you plan to pay back the loan. Monthly rest and annual review mortgages are two popular types of mortgage and, it must be said, are both relatively self explanatory, as we will see in the next couple of paragraphs.
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.
That said, the key thing here is whether or not the debt is actually being repaid because is you have an interest only mortgage it is of no consequence whatsoever if the interest is calculated daily weekly monthly or annually as the debt does not change so there is no benefit to derive. A lot of people set a lot of store in having a mortgage that is calculated daily but if it is interest only they do not stand to benefit in any way. The only time they will is if they make a capital repayment, if this does happen and they are on a daily interest calculation then they will reap the benefit of the reduced loan amount immediately.
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.
Up until about five years ago most lenders did charge interest on what is called annual review. They did this as it was helpful to their systems it meant that they only had to calculate interest once a year and it made no difference what happened to the mortgage debt throughout that year as they had already calculated what the interest was going to be for that year.
Times have changed considerably and nowadays most lenders will now lend money based on the monthly rest method. The market has changed and now customers have come to demand more flexibility from the lending companies. The desire and need of borrowers to be treated more fairly when it comes to borrowing money has created the need for monthly rest mortgages as people came to realise that annual review for those with interest only mortgages did not appear to make very god financial sense.
So look at the mortgage you are going for. If you have interest only and you do not intend to make any capital repayments in the future, it really makes very little difference if you have annual review or monthly rest. However, if the mortgage you think you might be going for is repayment, or if you think that there might be some chance of making a capital payment some time in the future, annual review will be of no benefit to you, and you would be wise to ensure that the method of repayment you have is monthly rest.
Article Source: http://www.search-raven.com
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