The true cost of mortgages: how the Annual Percentage Rate of Charge works

Hunting for a mortgage can be a complex process. Despite the swathes of information available on the internet, it can still be hard to get your head around the details of borrowing money with the intent of purchasing a property. The industry is littered with jargon about rates and margins that can be hard to follow.

Browsing the buy-to-let mortgage market can be a bit like finding the perfect needle in a giant haystack. A host of products exist to give consumers an array of options. But when lined up next to each other, it’s hard to gauge the actual value of these products, which complicates things even further.

Lenders are aware of the issues, with the last few years seeing legislators push for greater transparency on behalf of the public. The Financial Conduct Authority (FCA) have tried to demystify the different rates and how they relate to each other, making it easier for people to understand mortgages.


Understanding the true cost of a mortgage

The Annual Percentage Rate of Charge (APRC) was launched by the Mortgage Credit Directive to help consumers understand the true cost of a mortgage over its lifetime. It was then brought in by the FCA. As a rate, the APRC is based on conditions today and is expressed in percentage terms as a means to have customers compare products over the mortgage lifetime amongst competitors.

Consumers are now able to see the true price of different mortgages, which, in theory, results in more confident choices. It may only be the beginning of decluttering mortgage lingo, but the FCA have created a benchmark that customers can understand.

After all, the majority of mortgages last for 25 years, so it’s vital for consumers to be sure of the choices they make and what they’re signing up for.

APRC shortfalls

The importance of consumers having complete transparency over their mortgage decisions can’t be stated enough. That’s why any attempt on the part of regulators which helps decode and streamline the more inefficient parts of the industry is welcomed with open arms.

However, it’s worth pointing out that, while the APRC rate is revolutionary in its comparative functionality, it’s not necessarily the most crucial – or even the most useful – percentage that customers need to pay attention to when selecting a mortgage product.

The APRC is the overall cost of a mortgage over its lifetime. Most lenders know that customers choose to remortgage multiple times throughout a product’s lifespan so that they benefit from more favourable rates – especially in the buy-to-let sector.

The complexities of mortgages

The reasons may vary, but most consumers choose to remortgage because they want to bypass the higher Standard Variable Rate (SVR) that kicks in after the initial rate period is over – which is often between two and five years.

In practice, customers jumping from one initial rate to another won’t be able to make the most out of the APRC, as it’s not all that relevant for real-world mortgages unless you stick to the same one for 25 years.

It makes little financial sense for a customer to see their mortgage through for 25 years without switching to another product. And with remortgaging on the rise (January 2018 saw a 19% increase from January 2017), suddenly the APRC rate becomes more or less redundant.

While the introduction of the APRC should be commended for helping to modernise the industry, there is still much work to be done. Breaking down the “real” true cost of mortgages, including the initial rate and the SVR, is vital if regulators want to make the mortgage marketplace more accessible and transparent for mortgage hunters.

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