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Your mortgage APR explained

30 Mar 2020

APR means Annual Percentage Rate, and is prominently displayed with most mortgage rate material. 

It is the equivalent interest rate you will pay a) if you hold the mortgage for the entire term and b) if the lender doesn't change the interest rate for this entire term. It also includes the arrangement fee.

The chance of both these points being true is virtually zero - so the APR is useless. At best, you could say it enables you to compare mortgage costs, given current terms and conditions, over the full mortgage term. Given that most lenders change their competitive stance and positions frequently, it shows it doesn't tell you much

Which mortgage rates are important?

You need to keep in mind the initial discount rate you'll be paying, and the subsequent rate you'll be paying after the discount period. These two rates will give you the best idea of what your monthly payments will be - i.e. the most important bit for the majority of mortgage payers. These are the rates you can properly compare to other rates

Real example:

A current lender is offering the following tracker (not fixed-rate) mortgage: 

If we use a mortgage of £150,000, your monthly payments are worked out as follows:

Initial rate of 2.49%, so over one year you pay 2.49% of £150,000, which equals £3,735 – or a monthly payment of £311.25. Remember you’ll also have an arrangement fee of £1,500.

The subsequent rate is 4.84%, so after the first two years you’ll pay 4.84% of £150,000 per year, which equals £7,260 – or a monthly payment of £605

You’ll see the monthly repayment nearly doubles after the initial two-year period, which is significant. However, in reality you’ll be able to re-mortgage as this is the end of the early repayment period.

The APR of 4.7% says that: if you pay the arrangement fee of £1,500, plus £311.25 per month for the first two years, then £605 per month for the remaining 23 years – then you’ll have paid the APR of 4.7% per year on the loan over the 25 year term. (In this example, since the mortgage is interest-only, at the end of the 25-year term you'll also have to pay back the principle loan amount of £150,000)

Experience says that you would either re-mortgage after the initial period, and/or the interest rate will change in the subsequent 23 years – hence the limitations of using APR

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