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The Annual Percentage Rate (more commonly known as APR) is a tool to help consumers compare different loan products and their respective charges which at first glance may not be apparent.
On this page we take a look at Annual Percentage Rate (APR), and provide details and information on how it works, things to look out for, along with information on how we might be able to assist you in making the right choices when it comes to your mortgage.
Table of Contents:
The Annual Percentage Rate, or APR for short, was devised in the 1970's as a means of providing the consumer with a standardised method of providing a true comparison between different loans, including the cost of charges that may not immediately be apparent.
Often, to get a message across about a mortgage product, the lender will want to attract you to a particular feature of the plan. For example, a headline interest rate of 2.75% fixed for two years could be very appealing for a potential borrower. However, when underlying features such as a £995 Application Fee, £495 Valuation Fee, and Early Repayment Charges (ERC's) of 6% over a seven year mortgage tie in period are taken into account, the plan starts to look less attractive. As well as the headline rate of 2.75%, the Annual Percentage Rate must also be published to enable borrowers to make comparisons of interest rates and costs over the term of the mortgage.
Even if you had a degree in Applied Economics, comparing the rates that lenders charge would not be an easy task! Even with straightforward products you'd probably have an uphill struggle, let alone trying to compare complicated interest rate calculations between for example, a five year stepped fixed rate mortgage with a capped and collared cashback mortgage! Throw in the added complexities that some lenders charge interest on a daily basis, some monthly, and on an annual rest basis, all of which can have a substantial impact on the amount paid back over the life of the mortgage.
The APR was introduced under the provisions of the Consumer Credit Act to require lenders to provide this calculation so that borrowers could compare the cost of different loan products. The APR takes into account the various costs of setting up a mortgage, discount periods, and how often interest is calculated. The APR calculates what the average interest rate will be over the life of the mortgage.
So, how exactly do you calculate the APR? Good question, but unfortunately there is no easy answer! As mentioned above, lenders calculate their APR taking into account a number of varying factors that are different from lender to lender such as the administrative costs of setting up a mortgage, discount periods, and on what frequency interest is calculated.
Although the APR does go some way to ironing out the true cost of borrowing, the problem is that the average lifetime of a mortgage is considerably less than the initial twenty-five year term. This is usually because borrowers tend to move home or remortgage long before the end of the original term. Few borrowers keep their original mortgage until it is fully paid off, and therefore attempting to compare the total costs of mortgage repayments over twenty five years is usually quite unrealistic.
It is not always possible to use the APR to compare mortgages to even out some product differences that have more impact over the shorter period. Consider this example:
If your selections were based on the APR comparisons alone, it is likely that Mortgage 2 would be more beneficial, as over a full twenty five years the competitive SVR offered for the majority of the mortgage would probably outweigh the heavy early discount of Mortgage 1.
However, if you were to switch lenders after six years, then Mortgage 1 would have been the better option as you would have received a substantial discount of 11.25%, whilst only paying a higher SVR for a year or so.
Borrowers should also bear in mind that the APR takes no account of changes in interest rates and the effect that can have on different mortgage products. As interest rates will inevitably change during the course of capped, fixed, tracker or discount periods, then the APR will immediately become inaccurate.
Obviously the correct choice of mortgage product is crucial. Our Mortgage Advisors are all professionally qualified and will be happy to guide you through the complexities such as the issues described above. We'll carefully assess your needs, circumstances and aspirations, and provide you with advice and an appropriate mortgage recommendation.
So, why not get in touch with us. You can call us seven days a week on our Freephone number 08000 282 281, our lines are open from 8am until 10pm everyday, or why not contact us online anytime. We'll carefully assess your needs, circumstances and aspirations, and provide you with advice and an appropriate mortgage recommendation. We'd love to hear from you!
So that concludes our look at APR. Hopefully, we've managed to explain and answer any questions you may have had about how Annual Percentage Rate works. Don't forget we're only ever a free call or couple of mouse clicks away, and will be delighted to help in any way we can.
The overall cost for comparison is 9.8% APR.
The actual rate available will depend upon your circumstances. Ask for a personalised illustration. APR variable and based on a usual case. Most customers are likely to receive a lower rate or the same rate as our overall cost for comparison rate - learn more about APR.
There are no upfront broker fees.
However, a fee may be charged on successful completion. An indication is that on conforming cases (straightforward applications with no or minimal adverse credit) a fee may be charged of up to 1% of the amount advanced, typically £795 and will depend on your circumstances.
For non-conforming cases (where case research and processing may be more complex due to adverse credit or unusual circumstances), a fee may be charged of up to 3% of the amount advanced, typically £1,995.
THINK CAREFULLY BEFORE
SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED
IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Adding existing debt to your mortgage will increase the repayment term and overall cost.
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