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the difference between annual review and monthly rest mortgages

Mar 2, 2008
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 monthly rest the lender works out the interest payable on either a monthly or daily basis. It is then applied to the mortgage debt in either a monthly or daily way. The most apparent benefit of this is that you can benefit straight away from lower interest rates. All money being paid to help reduce the debt will therefore benefit from these interest rates on an ongoing 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.

The way the annual review mortgage works is that the lender would work out the amount of interest to be applied to the loan at the start of the year and add it to the loan amount there and then. The interest is therefore a lump sum which will not vary throughout the year. This is all well and good if you are making interest only repayments on your mortgage where the interest is not affected but if you are paying off any of the capital on the loan you will lose out because although your debt is being reduced, the interest for the year still remains the same.

Most lenders up until about 5 years ago used to work out the interest repayments on an annual review basis. They only had to make one calculation a year for each mortgage which would cover the rest of the year. The interest would be paid off no matter how the market fluctuated as the amount due had already been worked out, so there were obvious benefits to the lenders.

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.

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.
About the Author
Mortgage Route offers information help and advice on mortgages from qualified mortgage brokers along with free mortgage calculators and sourcing tools.
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