What is the difference between the mortgage interest rate and the APR?

15-May-2009

APR stands for the Annual Percentage Rate of change. The APR is calculated on mortgages by taking the total interest cost over the full term of the mortgage plus all applicable fees.  The interest rate is the actual percentage of your loan that the lender is charging you to borrow the money. The APR is a good basis of comparison between mortgage lenders, especially when there are so many different products and rates to choose between. You should never try and compare the APR of one lender with the interest rate of another, because the two calculations are totally different.The APR must take into consideration the following:

*    The interest rate that you pay (both introductory and standard variable rate (SVR)
*    The length of the loan agreement
*    How you choose to repay the loan (i.e. monthly or annually, interest-only or repayment&interest)
*    Fees that you are obliged to pay, such as set-up fees and valuation fees
*    Mortgage Protection insurance premiums (but only if the lender decides to make this a compulsory purchase)

How is the APR calculated?

The Annual Percentage Rate is calculated on the amount that you still owe to the lender, which is reducing each year.  Because you are paying the loan back on a regular basis, the interest payment you make reduces.  Therefore, the actual interest will not change year on year (provided that you are repaying on a fixed rate basis), but the APR will change each year depending on how much is outstanding.  

So why do the mortgage repayment amounts remain the same once you move to the lender's standard variable rate mortgage?  The reason for this is that it is normal for lenders to work out your repayments so that the amount you are paying back increases as your interest rate decreases.  This means that you are not hit with large payments in the first years of your mortgage agreement.  
    
What happens to my APR when the rates change?

If you are on a tracker mortgage, or another mortgage type where the lender's standard variable rate is determined by the Bank of England base rate, you will be notified by the lender (any SVR changes are usually applied the month after the base rate changes come into force).  Your APR will then be recalculated.