Almost two-thirds of lenders may be pocketing all the interest on money put into repayment mortgages during the course
of a year.
Although some UK lenders have for years been ensuring the capital element of mortgage repayments is used immediately to reduce the outstanding debt, 68 lenders out of 110 surveyed by the Moneyfacts monitoring service recalculate the debt, and the interest owing, only once a year.
Just 27 lenders recalculate the interest daily, so that it is paid only on the debt which is outstanding at any time.
A survey by Test Research, a member of the MORI Group, has found that 30% of homeowners do not know how their mortgage interest is calculated; 31% do not know which method gives them the best deal, and 42% erroneously believe annual calculation is most advantageous for the consumer. Only 28% know daily calculation is in their best interest.
All 10 of the biggest lenders in the UK are in the annual interest camp, which means that customers have to wait for up to a year before getting any benefit from their payments.
Peter Wood, mortgage product director at Royal Bank of Scotland, which commissioned the survey, said: ''The findings indicate the importance of looking beyond the obvious and selecting a mortgage which provides flexible payment methods and daily interest calculation. These benefits alone can easily outweigh any short-term discounts or cashbacks.''
The survey found that 57%
of homeowners have a mort-
gage where the interest is worked out annually.
Last week Nationwide belatedly joined the ranks of lenders promising a fair deal on repayments - but only on additional lump sums.
It said that borrowers who made a #200 lump sum payment every quarter, for instance, would pay off their loan three months earlier than borrowers doing the same thing at Halifax or Abbey National because of instant reduction of the debt. Those choosing to pay lump sums of more than #500 could opt to have their normal monthly repayment or the mortgage term reduced from the beginning of the following month.
Halifax, in fact, already allows extra payments of more than #250 as instant credits to the mortgage but only if it is specifically requested to do so. But both Halifax and Nationwide still fail to credit regular monthly payments with interest at the time they are made.
Halifax's Ian Begg said that the annual system ''has long been been used by a majority of lenders'' and was reflected in the APR figure for a mortgage.
He added: ''At this stage we do not feel that a change in the method of interest calculation
is warranted.''
TSB Scotland said nearly three-quarters of its borrowers had endowment mortgages, where interest calculations were irrelevant, while borrowers in arrears would benefit from annual interest calculation. Customers could make lump sum capital payments which would reduce the debt from the beginning of the next month.
The new breed of current account loans is led by Virgin Direct, which combines mortgage, savings, credit card and personal loan in one product and enables all credits to reduce the debt immediately, comes with the relatively high price tag of an 8.95% interest rate.
''With the Virgin account you cannot 'pigeon-hole' your finances, you cannot see that you have savings,'' said Janice Mack at Clydesdale Bank. Clydesdale offers a home loan package with credit card and personal loan rates of 8.5%, an instant access account paying 6.75% on deposits of #1, and a mortgage rate of 8.7% (one and two-year fixes available).
Royal Bank's Flexible Choice mortgage has a below average rate of 7.95% along with payment flexibility; Bank of Scotland's Personal Choice mortgage offers a chequebook to access overpayments, an overdraft of 5% of the loan and a personal loan facility of up to #50,000. Meanwhile, TSB Scotland's Joanne Bradley said: ''We like to address customers' individuals needs with more of a menu.''
Clydesdale and its linked Yorkshire Bank first advertised the flexible mortgage as an ''Australian import'' more than four years ago , with the slogan ''save #19,000 and repay your mortgage eight years early'' - by making regular additional payments.
Now Royal Bank of Scotland has mounted a similar campaign. It is advising customers they do not need ''an Aussie mortgage'', inviting new borrowers to ''join the existing Royal Bank customers who have been benefiting for years'' and pointing out that it has been running flexible mortgages since the early 1980s. The bank's Jayne Goodwin-Miller confirmed all Royal's mortgages employed daily interest calculation, and always had.
Mortgage interest calculation
Annual
Abbey National
Alliance & Leicester
Barclays
B'ham Midshires
Bradford & Bingley
Bristol & West
Britannia
Chelt & Gloucs
Dunfermline
FirstMortgage
Halifax
Nationwide
NatWest
Newcastle
Northern Rock
Portman
Scottish
Skipton
TSB
Woolwich
Yorkshire BS
Daily
Allied Irish Bank
Bank of Scotland
Clydesdale
Direct Line
First Direct
Legal & General
Midland
Prudential
Royal Bk of Scotland
Sainsbury's Bank
Scottish Widows Bk
Virgin Direct
Yorkshire Bank
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