Annual Interest Calculation (Over 25yr period)

The above graph shows the total interest payable on a mortgage of £100,000 over 25 years assuming a constant interest rate of 5.75%. By calculating interest on an annual basis, the amount of interest payable is calculated on the mortgage balance at the start of each year and unfairly it does not take into account any repayments made throughout the year. Remember on a capital repayment mortgage, part of the monthly payment is made up of a capital reduction element and by charging interest annually, you receive no benefit from each monthly reduction. In effect you are giving the lender an interest free loan!