Headline rates are not everything

There are various ways of working out the interest rate on your mortgage and an unbelievably wide choice of mortgages out there. All may not be what it seems, however. Don’t make the mistake of thinking interest rates are the “be all and end all” of the mortgage search.

If you’re paying interest only on your loan, with no capital repayment, the date that interest is calculated makes no difference, but otherwise it’s not quite so simple.

Some building societies offer loans on which interest is calculated and charged per annum. When interest is worked out in this way, the end result is that you are charged interest on money which you have already paid. This is because interest has been accruing for the full year on the amount outstanding. Often the building societies using this method are the ones that appear to be the leaders in the cheap mortgage tables, offering loans with rates as reasonable as 4.19%. In actual fact, when using this method of repayment you can effectively add 0.13 percentage points to the headline rate, making a rate of 4.32%. Amongst others, the Bristol and West, Leeds, Portman and Alliance and Leicester Building Societies use this method. Just to cause more confusion, they don’t necessarily use it on all of their mortgage products. The Portman have mortgages where interest is worked out in other ways, whilst the Alliance and Leicester make a distinction depending on whether the mortgage is direct or through a broker. The Bank of Ireland owns the Bristol and West Building Society, but they don’t use this method when loans are arranged through the bank.

Some of the smaller building societies still make use of the yearly calculation rates, including the Nottingham, Dunfermline and West Bromwich. This is thought be likely to change as they update their systems.

The other method of calculation of interest is worked on a daily rate. The balance outstanding will reduce on the day that the payment is made. Just to clarify the difference, if you had a mortgage of £100,000 with the Portman, on a two year discount mortgage, the headline rate would be 4.19%. Because of the way the interest is calculated (yearly) this would effectively be 4.32%. Repayment per month would be £544.20.Take the same loan with the same type of mortgage with Natwest. The rate is 4.29% but the interest is worked out on a daily basis. The repayment now would be slightly less, at £538.98.

Should you decide to go for an interest only mortgage, then the Portman would offer the most economical choice.

It appears the lenders using the yearly rate method feel that if they changed to the daily basis, it would be unfair on their existing borrowers.

It’s totally impossible to take on board all the variations of mortgages on offer, with new ones coming along daily, and so the best advice we can give is to consult a mortgage broker, who will take into account all your requirements and search out the best deal to suit your circumstances, at the best price. When it comes down to it, it’s that final figure for the monthly payment that counts!