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Warning over lenders’ annual interest calculations

Moneyfacts has warned of lenders that use annual interest that ends up costing customers dear.

It says that 20 lenders charge interest on an annual basis, meaning the total annual interest is calculated on the balance at the start of the year, not taking into accounts repayments that reduce the balance.

The 20 lenders include Bristol and West, Portman, Leeds and West Brom Building Societies.

Mortgage analyst Julia Harris says: “If you have battled your way through the minefield of mortgage options, interest types, rates, fees and other terms and conditions currently available, there is one final piece to the jigsaw of which many borrowers may be blissfully unaware, but which could end up costing them thousands of pounds in additional interest charges. It is purely down to the way in which their mortgage interest is calculated.

“Generally speaking mortgage lenders will adopt one of three different frequency periods for charging interest, daily, monthly or annually. Assuming only one monthly mortgage repayment is made, then daily and monthly interest will equate to the same total charge. This is by far the fairest method, whereby any repayments made will automatically be deducted from the balance, thus only charging interest on the mortgage balance outstanding.

“However, should the provider only calculate interest on an annual basis, monthly repayments will not be deducted from the balance for interest purposes. So for the full twelve months interest is charged on the mortgage balance owed at day one. Effectively the lender is holding your repayments until the end of the charging year, but will calculate the interest on an ongoing basis.”

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