If you're just starting out as a home buyer, navigating your way through the mortgage market and all of the jargon you come across can be a bit daunting. For instance, when it comes to calculating interest costs, one question you will want to know the answer to would be, is mortgage interest compounded monthly or yearly?
Trying to find the most suitable mortgage deal can be tricky, especially when you don’t fully understand some of the technical terms and the financial implications of what you are signing.
Finding a mortgage broker whose brain is bursting with facts and figures but doesn’t want to blind you with science would be a good starting point.
But also, you do need to know a bit about the sort of terms you will come across in your search for a suitable mortgage deal and you will likely come across a paragraph or two about compounded interest.
Granted, talking about things like compounded interest calculation methods might not be the most riveting topic of conversation, but it’s your money and your mortgage we are talking about, so it’s not a bad idea to get the lowdown on some of this stuff.
Let’s take a look at answering the right questions on interest calculations and other terms used in mortgage lending that are worth knowing about. You might even impress your friendly mortgage broker when you can explain in detail the answer to "Is mortgage interest compounded monthly or yearly?"
You might sometimes hear compound interest referred to as rolled-up interest. It’s the same thing.
It is the most common and fairest way of calculating interest on loans and mortgages.
The math can be a bit complicated but the bit you need to know is that the interest on your mortgage amount is calculated monthly. The reason this is the fairest system is that each time you make your monthly mortgage payment, the total amount you owe goes down.
This means that when you pay again the following month, you owe a lower total balance and therefore the amount of compound interest calculated will be lower too.
If the interest calculation was annual rather than monthly, you would pay more, so the mortgage lenders are actually treating you fairly in respect of how they charge you.
Here’s some even better news about why compound interest calculated monthly is good for your finances in the long run.
As you work your way through your mortgage deal and chip away at the balance each month, by the time you get near the end of the term you will be excited to see that you end up paying more of the capital each month and the interest gets even lower (because you owe less).
If you love number-crunching, you might be itching to see the actual magic formula that works all this interesting stuff out. You can view an explanation, Here you go, enjoy.
For the rest of us, the bottom line is that compound interest is calculated monthly and the more you pay and the longer you get into your mortgage term the more you pay directly off the mortgage balance each month.
A quick note about APR while we are talking about interest calculations.
You will see a mortgage deal quoted with an APR rate, which is the annual percentage rate.
This number is used to calculate the overall cost of your mortgage and is worked out to include interest and fees. The problem with using this number as a way of comparing deals is that it makes the assumption you will have the mortgage for the whole term
Many of us tend to swap and change when our current mortgage deal comes to an end so it’s usually best to look at the APR as a helpful illustration but not much else.
Another reason why you might want to talk to a helpful mortgage broker when searching for the right deal is that there are lots of different products available and only some of these would be a good fit for your personal circumstances.
Some mortgage products keep it simple for everyone. For example, a first-time buyer mortgage does what it says on the tin. It is a mortgage for people buying their first home.
Most industries love an acronym and the mortgage lending business has its fair share. So if your broker is talking to you about an SPV mortgage, SPV stands for Special Purpose Vehicle, they are obviously assuming you are a landlord looking to build up a portfolio of properties through a limited company vehicle.
More likely, especially if you are relatively new to the property game, your broker might tell you about an SVR mortgage. SVR is a Standard Variable Rate mortgage and this is the default interest rate you will be charged once any introductory rate offer expires.
In other words. If you were offered a three-year deal that was less than the lender’s SVR, once the three years were up and if you didn’t swap to another deal, you would carry on the mortgage at the standard rate. (This could be higher or lower than the one you were paying, depending on what happens to interest rates in the meantime)
Let’s be honest, most of us tend to have the need to try and borrow as much as we are sensibly allowed when first getting on the property ladder, and then work on borrowing less if you can afford a bigger deposit next time around.
You will often see LTV mentioned when talking about how much you can borrow.
LTV is another acronym and stands for Loan-To-Value ratio.
It’s about the percentage size of your mortgage compared to how much the property is worth.
The interest rate you are charged for your mortgage is based on risk. If you are borrowing 80% of the property’s value rather than 60%, for instance, you will probably be charged a higher rate of interest.
That’s probably enough jargon-busting you can take for now. Thank goodness you can talk to Mortgage Mentor, a friendly broker who loves to answer all of your tricky questions and help you navigate your way through the mortgage market jungle.
With free initial advice and zero broker fees, what’s not to like?
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