Monthly Interest

This is a method of working out the interest on a mortgage on a monthly basis. It is quite common for a lender to calculate the applicable interest each month, rather than annually. The lender will take the interest rate applied to the loan and work out the annual amount of interest due. They would then divide it by 12 to get the amount of interest due each month.

It is also possible to work out daily interest thanks to the improved computer systems now in use. Not all lenders do this though, so you might want to ask your lender how they calculate interest, so you know what to expect.

While interest is applied to all mortgages, it is important to note that repayment mortgages work differently to interest-only ones. The latter require you to pay off only the interest due on the loan each month. The capital amount remains unchanged, so you must put other methods in place to ensure you have the means to clear the debt at the end of the term.

With a repayment mortgage, most of the initial repayments will cover the interest and won’t touch the capital amount borrowed. However, as the years go on, the balance tips in favour of the capital, reducing it quickly to clear the mortgage by the end of the term. So, while monthly interest applies in each case, it works differently depending on the type of home loan you have got in place on your property.