When searching for secured loans, you must have encountered jargon that might have gone right above your head! It is understandable as financial matters and terms are sometimes hard to follow. One such acronym you can add to the list is APRC. Sounds similar to APR, right? However, they are different!
Let’s take a close look to understand APRC.
If you want to learn about APR, go through the guide we have created to help you understand what APR is and its aspects.
What is APRC?
APRC, the annual percentage rate of charge, shows the yearly cost of a mortgage or secured loan. The APRC calculates everything – from the interest rate on your mortgage to any additional costs. It is helpful when you are trying to compare different secured loans and mortgages.
APRC helps identify the different interest rates and other types of fees by different lenders. This is important because some financial institutions offer secured loans and mortgages with lower interest rates for only the first few years. If you calculate the APRC, you will understand the difference; hence, you will be able to choose the option that will benefit you the most.
When applying for a mortgage, you come across three different terms that you should know about:
- Initial Interest Rate: The initial interest rate will show you exactly what your interest rate will be for the initial mortgage period, which lasts from two to five years.
- Variable Rate: Once the initial interest rate finishes, you slowly move towards the lender’s standard variable rate (SVR), which typically is slightly higher than the fixed period rate. However, this rate stays the same throughout your mortgage unless you decide to re-mortgage.
- Fees: Besides the interest rates, there are other additional fees a mortgage comes with. Interest rates apply to these fees as well.
By calculating the APRC of any mortgage, you get a single figure that keeps in mind all of the interest rates and additional fees considered during the entire mortgage period. You will be handed the total annual cost of the mortgage. This means that it will show you how much you have to ultimately pay in total – counting in all additional fees and interest rates.
Why was APRC Introduced?
The APRC was introduced to create transparency between the mortgage lender and the borrower. Sometimes, the financial institution does not fully show what extra charges are implemented or how the entire interest rate structure works on different mortgages to allure more people. But, once you calculate the APRC of a particular loan product, you will understand the total cost of your mortgage, including the broker fee. This way, you see exactly what you will be paying for in the entire tenure.
How does APRC Work?
When you want a mortgage, you are introduced to an attractive introductory rate that lasts only for a limited period. This is called the initial interest rate. Next up, you will be moved to the standard variable rate – the real deal! It is slightly higher than what you were offered during the introductory period.
When calculating APRC on a mortgage, it takes into account both the introductory and long-term interest rate, along with additional fees, and then gives you the total calculation in the form of a percentage.
Let’s take a simple example.
Suppose you want to take out a secured loan with a tenure of 30 years against your house worth £150,000. Let’s say you have already made a deposit of £20,000, so now your mortgage amount is £130,000.
With the first mortgage option, your initial fixed interest rate is 2.99% which will move on an SVR of 4.94% and an arrangement fee of £250. For your second mortgage option, the initial fixed interest rate is 3.26% and an SVR of 4.34% with an upfront fee of £1,499. Considering the face value, the first mortgage looks attractive, with lower interest rates and lesser fees. But over the course of 30 long years, this option will cost you £218,026, while the second one will be £205,829.
Here’s when APRC comes in handy. The APRC of the first mortgage will be 4.6%, while for the second, it would be 4.2%. The real value of your mortgage will only be understood when you calculate the value through APRC.
How Useful is it to Calculate APRC for Mortgages?
APRC for mortgages is calculated by assuming that you keep the same mortgage provider for the entire tenure of the secured loan and that the interest rates stay the same. When you think about it in theory, this concept works fine for you to make informed decisions. But practically, not everyone stays with the same mortgage provider for the entire course. Moreover, even the interest rate will change if you switch providers.
There are many reasons for people to switch their mortgage providers. You might move somewhere else or find a more attractive deal. And if you are going to switch up constantly, rather than focusing on the APRC, focusing on the initial rate and set-up fees makes more sense. However, this does not mean APRC is not useful at all. It is a valuable tool for people who want to see the impact of various interest rates and fees and want to compare different providers.
What’s the Difference Between APRC, APR and AER?
APR, an annual percentage rate, does the same job as an APRC – giving you a single figure by considering interest rates and additional fees when borrowing. However, the main difference between calculating APR and APRC is that the latter considers that the interest rate will change. Since APRC calculates how much a mortgage will cost, it keeps the changing interest rates in mind. In contrast, APR is always used to calculate the interest rate and other fees of credit cards and personal loans.
On the other hand, AER (annual equivalent rate) is used to compare investments and loans (more preferred for loan comparisons). It reflects what your annual borrowing or saving cost would be.
What to Consider Before Applying for a Mortgage or Secured Loan?
Before you apply for any mortgage, consider its length, penalties for overpaying, general penalties and flexibility. You can find out what unique features a mortgage provides when you compare several loans!
To find the best mortgage deal for you, compare loan rates – from the initial period to the SVR. And then, think about the best mortgage option most suited to your situation.