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.

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.

It has to be said that most lenders nowadays do operate monthly rest mortgages and most of them do calculate their mortgages on a daily basis as the market has called for this over many years. This level of transparency has been a fundamental requirement for treating customers fairly as annual review for people with repayment mortgages does not represent very good value for money.

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.