Your Money: Borrowers unable to rest easy

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Hundreds of thousands of borrowers may be paying more than they should for their mortgages because they have been seduced by headline interest rates rather than the actual cost of their loan each month.

The potential overpayments, which affect repayment mortgages, occur because people do not read the small print on their loans. Many lenders credit repayments of outstanding capital once a year rather than monthly, when they are received.

As a result, borrowers pay much more than they should if the "rests", as they are called, were monthly.

The problem does not affect interest-only mortgages, where endowments or other investments such as PEPS run alongside the loan period to repay the capital at the end.

The use of different monthly and annual rest periods has sparked an Office of Fair Trading inquiry, which raises questions over whether advertised interest rates can be compared on a like-for-like basis.

For example, a pounds 50,000 mortgage at 7 per cent would cost about pounds 347 a month if capital repayments were credited monthly. However, if the capital is credited annually, the monthly cost becomes pounds 358.

About one-third of Britain's 10.5 million borrowers have repayment mortgages, leading some experts to suggest that lenders may pocket hundreds of millions of pounds of borrowers' payments each year by using the annual "rest" period.

Sue Anderson, at the Council of Mortgage Lenders, stressed the importance of checking the annual percentage rate (APR), rather than the headline rate which may not reflect different rest periods.

"The APR is not perfect, but it does give a very good general guide to whether a deal is good or bad," she said. "The best advice we can give to borrowers is to look at the monthly cost, the annual cost and the quoted base rate and then compare it to another offer."

The CML said most banks and building societies used annual rests. A CML booklet, How to Buy a House, explains how interest rates are calculated. It is available free (enclose an SAE) from 3 Savile Row, London W1.

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