Dingdongler

I'm a little embarrsed to even ask this as I should know this by now.

Looking at mortgage rate rates I see some that have an initial rate of say 2.5% but an apr of say 3.9%. What is it that pushes the headline rate from 2.5% to 3.9%?

Thanks

EddScott

Arrangement fee I would say.

Jamescsti

Could also be that the 2.5% is an introductory rate and after a period the rate goes up to the 3.9%?

Midlife......

iTrader: (2)

It depends on how you calculate the interest rate........

Shaun

Pjamie

Yep, that's exactly what it is. The APR is not the same as the actual interest rate. The APR was introduced to make it "easier" for consumers to compare rates from different companies since it represents the amount of interest you would pay over a year for a certain amount of borrowing.

The interest rate is the base figure but the amount of interest you actually pay can vary by so many factors depending upon how often the interest is calculated (daily, weekly, monthly), when you pay, how long a month is etc etc.

hodgy0_2

so in essence it simply represents the cost of borrowing money over a year

Midlife......

iTrader: (2)

That is what APR is meant to convey.....

Shaun

Dingdongler

Thanks.

I understand that the number that actually represents what you pay is the apr. I just don't understand wht this deviates from the headline rate so much.

For example a mortgage deal I was looking at had a figure of 2.5% but an apr of 3.9%. It did have an arrangement fee of £1000. However if you were borrowing a large amount of money over many years I can't see how that arrangement fee could push a rate from 2.5% to 3.9%

Thanks

Midlife......

iTrader: (2)

Isn't a headline a flat rate which "increases" when you calculate an APR equivalent?

Shaun

Chip

The APR tells you how much your borrowing will cost over the course of a year, as a proportion of the amount you have borrowed. So if you are borrowing £100 at an APR of 9%, you will pay £9 in interest and charges over the first year.

john banks

My mortgage has £1000 arrangement fee, 2.59% for 2 years, then reverts to 3.99% for the term. The APR is just a little lower than 3.99% because of the discount which lowers the APR, whereas the arrangement fee increases it a little.

So the APR is representative of the average interest you'll pay each year over the term of the loan, accounting for fees and introductory rates.

Dingdongler

Thanks.

John and Chip are saying different things. Chip says the apr is what the loan will cost you over one year. John says it is what the average cost would be per year over the term of the loan.

The latter makes more sense now that I think about it. So have I got this right?....

If a mortgage has a two year fixed rate of 2.5%, an apr of 3.99% and zero other fees then for the first two years I will only be paying £2.50 interest for each £100 borrowed per year?

Thanks

Dunk

iTrader: (1)

The APR on a mortgage would be quoted for the life of the loan (std practice on 25 years), hence a 2 year discount that reverts to SVR post 2 years, would show an APR very close to the SVR as only 2/25 would decrease the APR below the SVR.

D

Chip

Ding,

you will also need to know if your interest is calculated annually or monthly and your loan amount will also be decreasing monthly as well thus lowering the interest paid if of course it is calculated monthly.

Chip

Chip

Midlife......

iTrader: (2)

"John says it is what the average cost would be per year over the term of the loan..."

I remember Black Wednesday and wondering if I could pay the mortgage that month !

http://en.wikipedia.org/wiki/Black_Wednesday

Shaun

john banks

The assumption behind it of course is that the SVR or base rate (whichever is the reference for your duration of your mortgage after the initial period) is the same as when you take the mortgage out. This is the rate that is by far and away the major factor in the APR.

When taking out a product like this, I get out the calculator and make sure that I can derive the APR from the information supplied. If it doesn't line up I know there is a fee or assumption I haven't considered.

Dingdongler

Thanks for all the help.

Given that most of us tend to remortgage after the tie in/introductory period the apr is actually a bit useless isn't it? On any 20 year mortgage the apr will always tend to be close to svr especially if the introductory period is short. And we then swap the mortgage for a new one anyway as there is almost always something better on the market than just svr.

So though I understand the apr has some role, in reality what I need to know is the rate during the introductory period, any additional fees and whether the interest is calculated monthly or annually.

EddScott

IMO, I wouldn't be too concerned about daily or annual interest calculation. Most mortgages these days are daily. I don't think the difference is particularly huge anyway.

The initial rate, the type deal you choose (tracker, fixed, discount) and the arrangement fee are the threee things to take into account. Obviously its easier with fixed so for fixed, add each payment together plus the arrangement fee (there are sometimes others so check the Key Fact document carefully). Often you'll find that although the initial rate is low the arrangement fee is high.

Dunk

iTrader: (1)

Dingdongler,
I've just been sorting out a new offset for myself, if you want the spreadsheet I've built to run comparisions let me know.

D

Dingdongler

Thanks Dunk, I'll let you know whether I decide to go with an offset.