Lenders calculate the interest on a mortgage loan mainly in two ways – annual review or monthly rest. Either one could be the better option for a borrower; it simply depends on how you plan to pay back the loan.

If you choose a monthly rest mortgage your interest will be calculated either daily or monthly and then applied to your loan accordingly. If you are repaying your debt continuously this is a great option because the more you pay on your loan the lower your interest rate will be on a daily or monthly basis.

The important thing with this type of mortgage is to be sure that you are actually decreasing the total debt you owe. For instance if you have an interest only mortgage your payments only pay the interest so you aren’t reducing the debt and this isn’t a good option.

Annual review mortgages have lenders decide the amount of interest that should be applied to a loan and the beginning of the year and that amount is added to the loan at that point. This means that the interest is a lump sum that doesn’t change throughout the year. The downside to this loan is that no matter how much of the loan’s principle you pay off, the interest remains the same.

Most lenders today use monthly rest mortgages and oftentimes they calculate the mortgages on a daily basis. This is considered a fairer treatment for customers because they are paying on only the debt they owe year round. And as a borrower, this is usually the best option for you as well, to avoid paying more interest than necessary.