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Annual review Interest...

As interest is charged by every lender on every mortgage or loan, the lender needs to decide how exactly they intend to calculate it, as it will have a significant effect on how much is charged and in turn how much money they actually make..

There are essential two ways a lender can charge interest. One is by Monthly rest, which will be dealt with on the previous page to this one and the other is Annual review and it is this way we will explain here on this page.

Please note the graph below is not accurate and is for illustrative purposes only.

Unlike monthly rest with annual review interest is calculated and charged annually.

There are some downsides to this.

One is, if rates change in a downward direction you may not reap the benefit until the end of the year when your rate is reviewed. However that said if rates rise the lender may not pass that rise onto their customers until their rate review at the end of the year.

Another is to do with repayment mortgages. If you have a repayment mortgage and interest is calculated annually you could end up paying more in interest over the term.

The reason for this is, if the lender calculates the interest at the beginning of the year based on the rate that they are charging and based on the outstanding balance at the time, that calculation will not take into consideration that the balance will reduce throughout the year due to capital repayments.

An example of this is a 100,000 mortgage, in month one you will pay interest due on the amount and make your payment however by month 10 you might only owe 99,000 but you will still be paying the same interest attributed to the 100,000 debt that was calculated at the beginning of the year.

By the end of a 25 year mortgage term this discrepancy on a repayment mortgage can be quite significant.

This is not to say that all lenders that operate annual review actually pre-calculate interest in this way but it is a question that you should ask either your mortgage advisor or your lender direct.

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