Look on any mortgage advert, and loudly and prominently you will see the APR. The regulations state it must be equally as prominent as the biggest other rate. The only problem with this is it’s a meaningless number that bears little resemblance to the amount most people end up paying.
The supposed consumer protection regulation that enforces this display of information just goes to confuse consumers. We need a far more joined up way of doing this.
What does the APR show?
The APR shows you the effective averaged annual interest rate if you held your mortgage for the entire term (normally 25 years).
So if you had a fixed rate at 3.49% for two years, which then jumped to the Standard Variable Rate (SVR) afterwards of 4.74%, the APR would be around 4.5%.
Why is it meaningless?
Well, firstly you never pay it. On the above example, you pay 3.49% for two years, then 4.74% afterwards, but at no point would you ever pay the 4.5% APR. It doesn’t reflect the reality.
But surely as it shows the price over 25 years, it’s good for comparisons?
Not really. First of all, very few mortgage holders stick with the same mortgage over 25 years. Most remortgage and chop and change at some point – so averaging over the full term doesn’t make that much sense.
In fact for many, the key point to do that is after the initial discount or fixed rate ends and the rate jumps.
But it’s more than just for that reason. Remember, the APR rate is variable, as the SVR rate is variable. So it can change both with interest rate moves or sometimes just because the lender wants to change its competitive stance.
Therefore, by the time your discount or fix ends, it could be a totally different, meaningless concocted rate from the one originally laid out.
So what rate should I use them?
You just need to focus on the initial discount rate and be aware of what the SVR rate is afterwards, that’s what you pay and it’s only that you can really compare to other rates. Comparing on the APR is just a confusion.
If you’re struggling, read my free first-time mortgage booklet or my free remortgage booklet.
Ps. A few people have mentioned fees to me, and while of course when assessing a mortgage cost the fees are crucial (I go into detail about how to assess it in the two mortgage guides linked above), this is the remedial stage before that – simply how to assess the interest rates.