What does APRC mean and why does it matter when borrowing?

When you’re searching for a mortgage or secured homeowner loan (loans secured against your home), it’s important that you understand the rates, so you can gauge if you’re getting a good deal.

Find out how looking at an annual percentage rate of charge (APRC) when comparing mortgages can help.

What is APRC and what does it mean?

APRC is an annual interest rate designed to show you the total cost of your mortgage.

The APRC is calculated by taking into account the interest rates, fees and charges that would apply to your mortgage if you kept it for its entire term, even when you’re switched to the standard variable rate (SVR).

All mortgage lenders are required to quote the APRC of their products when they advertise them.

They can therefore be a useful way for you to compare quotes from different mortgage lenders.

How is an APRC calculated?

It’s calculated by considering the initial rate, follow-on rate, plus all fees and charges that apply to your mortgage, this is then shown as a percentage which allows you to see how much the mortgage would cost you annually if you stuck with it for its entire term.

APRC analyses the following:

Initial mortgage rate

When you take out a mortgage, you usually sign up for an initial deal period at a fixed rate, or lower variable rate, such as a tracker or discount product.

The deal lasts for a set length of time - commonly two or five years, for example.

Follow-on mortgage rate

Once your initial mortgage rate ends, you’ll usually be moved onto your lender’s SVR, sometimes referred to as the follow-on rate.

Follow-on rates are typically higher than the initial deal rate, so many people opt to remortgage at this stage.

Fees and charges

Mortgage-related costs can include arrangement fees, redemption charges and valuation fees, for example.

Why has it been introduced?

The Financial Conduct Authority (FCA) introduced the APRC to help customers get a more broad and realistic view of how much a mortgage would cost them over its full term, rather than just for the initial deal period.

In the past, mortgage lenders were only required to show the annual percentage rate (APR) which illustrated the initial interest rate of their products. This could be misleading to the customer.

How useful is it when measuring the cost of mortgages and secured loans?

Because all mortgage deals must show an APRC rate, it helps you easily compare the true cost of each loan over its full term. The lower the rate, the less the mortgage would cost if you stuck with the same product until it was paid off.

In that respect, the rate can help customers see beyond a deal that offers low introductory interest rates, but ends up being a lot more expensive than other products, because of a higher follow-on rate and charges.

Similarly, it could highlight the fact that a mortgage with a higher initial rate, but lower variable rate and fees could cost less overall.

However, in reality, the APRC is of limited use for many mortgage customers, because most people won’t remain with the same mortgage product or provider for the full life of the loan.

In fact, it’s a good idea to compare deals each time your initial rate comes to an end and switch to a more competitive deal.

What’s the difference between APRC, APR and AER?

While APRC is applied to mortgages and other secured homeowner loans, it’s not to be confused with APR and AER.

APR is a percentage that expresses the annual cost of unsecured loans - like a personal loan, hire purchase or credit card.

For example, a £10,000 loan with 5% APR will charge £500 in interest and other costs each year for the duration of the loan.

This makes it simple to compare products, as you just need to look for the lowest APR.

AER stands for annual equivalent rate. It’s applied to savings and helps you compare how much interest you could earn in a year, including any introductory bonuses, compounding and charges.

How do you get a low APRC loan?

A mortgage provider will advertise a representative or typical APRC rate. This rate, or lower, will apply to at least 51% of people who apply for the loan. Be aware that you may be charged a higher rate than the one advertised.

Lenders calculate and offer rates based on several things, such as the amount you’re borrowing, the length of the mortgage, your financial status and credit history.

Having a good credit history can help you access the best deals.

Always compare the different mortgage options on offer, including fixed-rate and variable options to find the right choice for you.

What should I consider when applying for a mortgage or a secure loan?

To work out which is the best mortgage deal for you, compare rates during the initial term and remember to take fees into account, too.

Make sure you think about what type of mortgage will be most suitable for your situation and what length of deal is appropriate for you, whether that’s two years or five years.

Look into whether features like the ability to overpay your mortgage or switch deals without penalty are important to you.

A mortgage adviser will be able to guide you towards products that fit your situation now, as well as your future plans.