You might think this is a strange question and be of the opinion that it is calculated the same way as everyone elses. Well the fact is that how your lender calculates the amount of interest that you owe can make a significant difference to how much interest you pay.

With Interest Only mortgages the amount of loan that is outstanding remains the same throughout your mortgage deal and therefore the amount of interest you pay is known at the beginning of each year, assuming interest rates dont change.

However, this is not the case with repayment mortgages, also known as capital and interest mortgages. With this type of mortgage part of your monthly payment is used to reduce the amount of your loan outstanding. This means at the end of each year you will have less mortgage debt than at the start of the year. A number of years ago most lenders calculated interest annually. This meant that at the start of each year they looked at the amount of mortgage that you owed and based the interest that you would pay in the following year on that amount. They took no account of the amount of your mortgage that you paid off monthly during that year. At the end of the year they would look at the reduced amount of mortgage that you now had and start the process again.