"Certain lenders have responded to criticism over the annual compounding of interest by calculating interest more frequently, on a monthly or daily basis"
Herein lies one of the great mortgage controversies of our times. The annually reviewed interest system implies that monthly repayments of capital are not taken into account until the end of the annual accounting period. The borrower is effectively paying interest on capital that has been repaid progressively over the year.
Irregular additional lump sum payments will likewise not be reflected immediately in reduced interest payments. For example, if you make a one-off repayment of £1,000 on top of your regular monthly repayments, you will have to wait until the end of the annual accounting period before that £1,000 is deducted from the amount that you still owe and before interest is recalculated. In the meanwhile, you will continue to pay interest as if you had never paid the additional £1,000.
If you have a home loan where interest is calculated annually, your best course of action is to time one-off capital repayments as close to the end of the annual accounting period as possible.
Monthly computation of interest
Certain lenders have responded to criticism over the annual compounding of interest by calculating interest more frequently, on a monthly or daily basis
http://www.telegraph.co.uk/finance/personalfinance/2955757/Capital-repayment-options.html.
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