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.

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.

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 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.