What is Annual Percentage Rate of Charge (APRC)?

When applying for a mortgage, one of the most important measures to understand is the Annual Percentage Rate of Charge (APRC).

What does APRC mean?

APRC is a measure that reflects the total cost of borrowing over the full term of a mortgage, expressed as an annualised percentage rate. It takes into account not just the interest rate, but also fees, such as arrangement, valuation, legal and broker fees. Moreover, it assumes that the initial low introductory interest rate, which is not uncommon, will revert to the lender’s higher rate after the end of the introductory rate period and that the higher rate will apply unchanged thereafter. Although such an assumption about rates may not apply in reality, the APRC, nevertheless, serves the purpose of enabling one to compare the lifetime cost of different types of mortgage deal at any given point of time.

What is the initial mortgage term cost?

The initial mortgage term cost refers to the cost of your mortgage during the introductory period. Many mortgage deals come with an attractive introductory interest rate, which may typically apply for two, three or five years. The APRC, however, not only considers these initial rates, but also subsequent rates, when the mortgage is assumed to revert to higher rates. This is so that borrowers are aware of the costs beyond the "honeymoon" period of lower interest rates.

What is the Annual Percentage Rate (APR)?

The APR reflects the cost of borrowing over one year, not the lifetime of the loan. Whilst it takes into account potential fees, it relies on a single interest rate, the initial rate, not expected future interest rate changes. Thus, whilst the APR also allows for a comparison between different mortgage deals, it is generally lower that the APRC and is more influenced by the initial introductory rate.

What is the difference between APRC, APR and AER?

• APRC (Annual Percentage Rate of Charge): Used for mortgages, it includes initial and subsequent interest rates plus any fees over the full term of the mortgage.

• APR (Annual Percentage Rate): Used for all types of loan, it reflects the initial interest for 12 months and fees. It does not attempt to account for expected future interest rate changes.

• AER (Annual Equivalent Rate): The AER typically indicates the interest you will earn on a deposit in a savings account over 12 months. It is not relevant for mortgages, but important for understanding the rate at which your savings will grow.

While APRC is specifically designed to provide mortgage applicants with an understanding of long term mortgage costs, APR and AER are narrower in scope and serve other purposes.

How does an APRC calculator work?

You can use an APRC calculator to estimate the long term cost of your mortgage. The factors that an APRC calculator takes into account include:

• Mortgage Amount: The size of the mortgage loan you are taking out.

• Interest Rate: The rate at which interest will accrue during both the initial term and subsequent periods.

• Fees: Any fees, such as arrangement, valuation, legal and broker fees.

• Term Length: How long the mortgage is for. This is typically 25 or 30 years.

What does APRC mean when applying for a mortgage?

When you are applying for a mortgage, the APRC should help you compare different mortgage deals. In particular, it gives you a good comparative understanding of the long term costs of different mortgage products you are considering, regardless of different low initial rates or fee structures.

For instance, you might be tempted by a mortgage with an introductory rate of, say, 1.5% for two years. But if the APRC is 4.5%, this means that costs are expected to rise reasonably significantly after the initial two-year period after factoring in fees and the follow on interest rate. On the other hand, another mortgage may have a higher introductory rate, but a lower APRC. Thus, using the APRC allows you to take a long term view of different mortgage deals.

However, it is also worth bearing in mind that, in reality, borrowers are typically required to reset their mortgage rate every two to five years by choosing from a menu of new fixed and tracker rate “deals” offered by their lender. These rates may be lower or higher than the previous rate depending on the prevailing interest rate environment. The APRC is not designed to take such future interest rate deals into account, whereas borrowers frequently rely on a succession of such deals in reality.  

Conclusion

APRC aims to provide a picture of the cost of a mortgage over the entire life of the loan, as it takes into account interest rates over the life of the mortgage, as well as fees such as arrangement, valuation, legal and broker fees. It is thus also an important tool for comparing different mortgage products and deals at any given point of time. However, the APRC is also a limited tool, as borrowers, in reality, end up choosing a succession of interest rate “deals” throughout the life of a mortgage, which are shaped by the prevailing interest rate environment, lender policies and competition between lenders.

FAQs

Q. What is APRC and why is it important when applying for a mortgage?

A. APRC stands for Annual Percentage Rate of Charge. It is a measure that reflects the total cost of borrowing over the full term of a mortgage expressed as an annualised percentage rate. It takes into account not just interest rates over the life of the mortgage, but also fees such as arrangement, valuation, legal and broker fees. It assumes that the initial low introductory interest rate, which is not uncommon, will revert to the lender’s higher rate after the end of the introductory rate period and that the higher rate will apply unchanged thereafter. Although these assumptions about rates may not hold in reality, the APRC, nevertheless, enables one to compare the lifetime cost of different mortgage deals at any given point in time.

Q. How is APRC different from the interest rate on a mortgage?

A. While the interest rate only shows the current cost of borrowing, the Annual Percentage Rate of Charge (APRC) takes into account not just interest rates over the life of the mortgage, but also fees such as arrangement, valuation, legal and broker fees. It assumes that the initial low introductory interest rate, which is not uncommon, will revert to the lender’s higher rate after the end of the introductory rate period and that the higher rate will apply unchanged thereafter.

Q. How does APRC differ from APR?

A. The Annual Percentage Rate of Charge (APRC) takes into account not just interest rates over the life of the mortgage, but also fees such as arrangement, valuation, legal and broker fees. It assumes that the initial low introductory interest rate, which is not uncommon, will revert to the lender’s higher rate after the end of the introductory rate period and that the higher rate will apply unchanged thereafter. The APR reflects the cost of borrowing over one year, not the lifetime of the loan. Whilst it takes into account potential fees, it relies on a single interest rate, the initial rate, not assumed future interest rate changes.

Q. What factors are included in the calculation of APRC?

A. The calculation of the Annual Percentage Rate of Charge (APRC) takes into account the mortgage loan amount, the rate at which interest will accrue during both the initial term and subsequent periods, any fees such as arrangement, valuation, legal and broker fees, and the length of the mortgage.

Q. How can APRC help in comparing different mortgage deals?

A. The Annual Percentage Rate of Charge (APRC) allows you to compare the total lifetime cost of different mortgage products even if they have different introductory interest rate or fee structures.

Sources:

What is APRC | Money.co.uk | Published Mar 24

What's an APR? | Barclays