Headline Rates Are Not Everything
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Headline Rates Aren't Everything
When searching for a mortgage, it's crucial to remember that headline interest rates aren't the only factor to consider. While the variety of mortgages available is enormous, focusing solely on interest rates can be misleading.
For those with interest-only loans, the calculation date of interest might not matter much. However, if you're repaying the principal, the timing of interest calculation becomes significant.
Some building societies calculate and charge interest annually. This means you're paying interest on the full amount for the entire year, even on funds you’ve repaid. While these societies might seem to offer competitive rates, like 4.19%, this method effectively increases the rate to about 4.32%. Societies like Bristol and West, Leeds, Portman, and Alliance & Leicester use this approach.
To add to the complexity, not all mortgage products from these societies use the same calculation method. For example, Portman and others might calculate interest differently based on the mortgage type or whether it’s arranged through a broker. Interestingly, though the Bank of Ireland owns Bristol and West, they don't use the annual calculation when arranging loans through the bank.
Smaller societies such as Nottingham, Dunfermline, and West Bromwich also use yearly rates, though changes might occur as they update their systems.
The alternative method is calculating interest daily, which means the outstanding balance decreases the day a payment is made. For example, a £100,000 mortgage with Portman at a headline rate of 4.19% results in an effective rate of 4.32%, costing £544.20 per month. Meanwhile, with Natwest's daily calculation method, a similar loan would have a rate of 4.29% and a lower monthly payment of £538.98.
For interest-only mortgages, Portman might be the most economical choice. However, lenders using yearly rates often feel switching to daily calculations could disadvantage current borrowers.
With countless mortgage options available and new ones emerging regularly, it's impossible to consider every variation. Therefore, consulting a mortgage broker is advisable. They can assess your needs and identify the best deal for your circumstances and budget.
Ultimately, the most important number is your final monthly payment.
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