I’m surprised how many just focus on the monthly rate. The way interest is charged is equally as important as it can make a big difference in how much you pay.
Firstly you should have been made aware of this before the application stage.
There are three ways for lenders to calculate interest:
Serviced
This is when you will pay a monthly amount calculated on the interest rate so no deductions are taken from the loan to cover the interest for the period. Some lenders do not offer this facility and the ones that do require proof that you can make these repayments from your income.
Retained interest
An amount which covers the total number of monthly interest payments and the setup fee is deducted from the initial loan. With some lenders, you can choose the number of months that are retained and service the rest. The retained interest is still part of the amount that you borrow so interest will also be charged on this amount by the majority of the lenders. This way at the end of the loan you will not exceed the lenders LTV.
Rolled up interest
This is a better way of calculating interest and again is aimed at borrowers who are not able to make the monthly interest payment. Interest is compounded which reduces the overall costs.
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