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The Difference Between Annual Review And Monthly Rest Mortgages |
By:
Chris Clare |
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the difference between annual review and monthly rest mortgages
Chris Clare
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 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 interest is a bit of a throw back of the past for mortgages. The lender would look at the size of the debt at the beginning of the year, they would work out what level of interest they were going to charge on it and apply that debit there and then. This meant that for the whole year you were essentially paying of the full years interest. The downside to this is if you repaid some of the debt by lump sum or just standard repayments you got no benefit for it as the interest had already been worked out in advance.
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.
So when choosing your mortgage if you are electing to go the interest only route and you do not intend to make any capital repayments don't worry too much whether you have annual review or monthly rest. However if you are setting up a repayment mortgage or if you are intending to make additional capital payments to your mortgage you had better try and ensure you have a monthly rest deal preferably with interest calculated on a daily basis for the maximum benefit.
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Article Source: http://www.statssheet.com/articles/article71151.html |
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