Cutting the cost of borrowing

Barclays this week upped the ante in the battle for mortgage customers by announcing it is changing the way it calculates interest on its home loans - a move that will mean lower monthly bills for 130,000 borrowers.

The bank, which is desperately trying to restore its battered reputation, is abandoning the much-criticised "annual interest" system and moving all its repayment borrowers over to daily interest calculation.

Barclays says it is the first top 10 lender to do this. Customers won't have to apply for it or switch to a new product. However, the change applies only to repayment rather than interest-only mortgages.

Most of the major lenders calculate interest annually, even though this practice has been condemned as a "scam" by the Consumers' Association because it means that people end up paying interest on debt they no longer owe.

With daily interest calculation, every mortgage payment a customer makes - either their regular monthly payment or a lump sum - will immediately reduce the amount on which interest is charged. Even if extra payments are not made, a customer with a £100,000 mortgage would save more than £2,500 over a 25-year term, based on today's interest rates, says Barclays.

Some big lenders have been operating daily interest calculation for some time. HSBC has been doing it since 1979. Others limit it to flexible mortgages. Many of the new internet and phone banks have it as standard. Where do some of the other banks and building societies stand?

Halifax: Introduced daily interest for existing standard variable rate customers last month, but they have to request it. That's because it says daily interest calculation "is not right for everybody - those in arrears would not want daily interest because it would mean their debt would be increasing daily".

NatWest: Vast majority of borrowers on annual interest system, though the merger with Royal Bank of Scotland could change that because RBS has operated daily interest calculation for some time. Offers daily interest calculation on its flexible home loan.

Nationwide: Uses the annual interest system for all borrowers; no plans to change.

Alliance & Leicester: The vast majority of its borrowers are on the annual interest system. It plans to introduce daily interest some time in the future. Offers monthly interest calculation on its flexible home loan.

Cheltenham & Gloucester: Vast majority of borrowers on annual interest calculation, but offers daily interest on its flexible home loan.

The Savings:

By having interest calculated on a daily, rather than annual, basis a customer with an £80,000 repayment loan would see their monthly bill reduced from £610 to £603 - that's £2,091 over a 25-year term based on today's interest rates. Any overpayments the borrower makes would mean further savings, as these will reduce the total amount of interest charged as soon as they clear.