Headline rates don't give the whole picture

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For example, if your mortgage is an interest-only one with no payments on ( life insurance policies ) your capital, the date your interest is calculated makes no real difference. For other methods, however, that timing could be very important.

On some loans, the building society works out the figure on which repayments are based annually. This means that even when you pay money back over the course of the year, thus reducing the amount you owe, you are still charged as if the total had not changed – until the end of the repayment year. The net result is that you end up paying interest for money you have already paid back!

Because of their attractively low headline rates, the building societies using this annual ( mortgage quotes ) method are often the ones at the top of the mortgage tables. High street firms such as the Bristol and West, Leeds, Portman, and Alliance and Leicester Building Society offer mortgages at 4.19%. But when you consider that they also calculate interest on these loans annually, the real rate you pay becomes higher. Over the year, the amount you pay works out at 0.13% more, so the total charge is actually 4.32%. Not quite so attractive!

Just to add to the mix, not all companies use the same methods on all of their mortgages. The Portman use a different method entirely, whereas the Alliance and Leicester use the per annum charge for some products, depending on whether you deal with them directly or through a broker. The Bank ( personal secured loans ) of Ireland uses another system on their own direct loans, but returns to the annual interest calculation for the Bristol and West, a building society owned by the bank. And to further complicate the situation, many of the smaller building societies – like the Nottingham, Dunfermline and West Bromwich - use an annual rate too, although they are likely to be updating in the future as systems and equipment change.