We recently wrote a post about jargon terms that you’re likely to hear when applying for a mortgage. APR is most definitely one of them. Officially termed annual percentage rate, APR has a significant role to play when it comes to borrowing money to buy a house. So it’s handy to know what it entails and how it impacts your mortgage. That’s what this guide is for – to tell you everything you need to know about APR.
APR: a quick summary
|APR||The amount of interest and fees you will pay on the money borrowed over a year|
|Representative APR||The lender only needs to offer the rate advertised on a loan or credit card to at least 51% of applicants|
|Personal APR||The rate that you are eligible for depending on personal circumstances|
|APRC||Similar to APR but used primarily for mortgages and secured homeowner loans|
What is APR?
The annual percentage rate (APR) is the official term used to help you understand borrowing costs. You’ll hear it when using a credit card, taking out a personal loan, or for pretty much any type of credit.
Essentially, it refers to the amount of interest and fees you will pay on the money borrowed over a year. It’s calculated using a formula in the Consumer Credit Act (1974), with each lender required to follow.
So isn’t APR just an interest rate? APR is a more inclusive term, as it takes into account extra fees as well as interest. Think of the APR as the entire picture, covering the product fees, interest and any other costs associated with the loan.
How is APR calculated?
When calculating APR, lenders use a number of variables. These include:
- The interest rate
- Whether it’s charged daily, weekly, monthly or yearly
- Initial fees (product fees on the loan, for example)
- Any compulsory charges applied that need paying as a condition of taking out the loan.
What is representative APR?
When you’re using online comparisons to find the best mortgage offer, you’ll likely see the words “representative” in regards to the APR. When a loan is advertised as “representative”, it means that at least 51 per cent of customers receive the same rate (or lower) than the representative APR.
However, not everyone within that 51 per cent will get the exact same rate. So when it comes to applying, the lender will actually give you a “personal APR” based on your own circumstances. Your personal APR could be lower or higher than the representative rate.
What is a personal APR
One minute you’re getting to grips with APR, then you’re working out the representative APR, and now you need to get your head around personal APR. That’s a whole lot of APRs, but it’s all fairly straight forward.
The personal APR is the rate offered based on your circumstances and the amount you’d like to borrow. It covers things like your income, credit score and the length of borrowing, with the lender combining all of these aspects to help decide what you’re eligible to borrow.
How do I find out my personal APR?
Most people won’t know their personal APR until they’ve applied for finance. The lender performs a credit check to see how much they can lend you, and at this point, you will have a better idea of your personal APR.
A credit check can affect your credit score, and in an ideal world, the lender will perform a soft search to give you an idea of how much you’re eligible to borrow so it won’t impact your score. For example, here at Molo we check your eligibility without needing to perform a hard credit check. Consequently, your credit score isn’t affected.
What is APRC?
So, so many acronyms. APRC means annual percentage rate of charge and is the same as APR. However, it’s a more commonly used term for mortgages and secured homeowner loans. Therefore, you’re likely to come across the term “APRC” when checking your mortgage eligibility and filling out the application form. So if you find yourself asking “what is an APRC mortgage?”, then worry not, as it’s just another term for APR.
Why are APR and APRC necessary?
All lenders are required to show the APR on their products by law, according to the Truth Lending Act of 1968. It allows you to compare mortgages and get a better idea of the true cost before deciding on a lender. This could be when you’re using a mortgage calculator to work out the total cost or are searching around online.
APR also prevents lenders from hiding additional costs to make their offering look better than it really is. It allows you to get a true representation of borrowing while providing more transparency when you search for the best lenders.
Knowing the APR allows you to calculate the true cost of the loan annually. The APR will offer you more peace of mind, as you will better understand all of the costs associated with your mortgage.
Now I know my APR
Having insight into APR and APRC gives you a better understanding of your borrowing costs and how the costs are calculated. So now that you know a thing or two about APR, why not head over to our products page and find your next mortgage?