There are many ways to figure out the interest rate on your mortgage, and you can choose from a huge number of mortgages. But not everything may be as it seems. Don't make the mistake of thinking that interest rates are the only thing that matters when looking for a mortgage.
If you're only paying the interest on your loan and not the principal, the date that interest is calculated doesn't matter. But if you're paying both the interest and the principal, it's not quite so simple.
Some building societies offer loans with interest that is calculated and charged per year. When interest is calculated this way, you end up paying interest on money you have already paid back. This is because interest has been added to the amount owed for a whole year.
Most of the time, the building societies that use this method are the ones at the top of the cheap mortgage tables, with rates as low as 4.19 percent on loans. In fact, if you use this way to pay off your loan, you can add 0.13 percentage points to the headline rate, bringing it up to 4.32 percent. This method is used by the Bristol and West, Leeds, Portman, Alliance and Leicester, and other building societies.
Just to make things even more complicated, they don't use it on all of their mortgage products. The Portman has mortgages with different ways of figuring out the interest, while the Alliance and Leicester make a difference based on whether the mortgage is done directly or through a broker. The Bristol and West Building Society is owned by the Bank of Ireland, but they don't use this method when loans are set up through the bank.
Some of the smaller building societies, like the Nottingham, Dunfermline, and West Bromwich, still use rates based on the year. People think that this will probably change as they update their systems.
The other way to figure out interest is to use a daily rate. On the day that the payment is made, the balance will go down.
To explain the difference, if you had a GBP100,000 mortgage with the Portman, the headline rate for a two-year discount mortgage would be 4.19 percent. Since interest is calculated once a year, this would amount to 4.32 percent. Each month, you would have to pay back GBP544.20.
Take out the same loan with the same type of mortgage from Natwest. The rate is 4.29 percent, but the amount of interest is calculated every day. Now, the payment would be GBP538.98, which is a little less than before.
If you choose an interest-only mortgage, the Portman would be the most cost-effective option.
It looks like the lenders who use the yearly rate method think it would be unfair to their current borrowers if they switched to the daily basis.
There are so many different kinds of mortgages and new ones come out every day that it's impossible to keep track of them all. The best thing to do is to talk to a mortgage broker, who will take into account all your needs and find the best deal for you at the best price.
In the end, what matters is the final amount for the monthly payment.
