Guide to APRC on Mortgages

Mortgages can be complicated products to wrap your head around, especially if you are a first-time buyer or you have not required a mortgage in a long time. For this reason, the FCA stipulates mortgage documentation be presented to borrowers with terms and jargon explained wherever possible.

Despite information being clearly displayed, it can be confusing to understand what interest rate you are being charged, what happens when your rate term ends, and how often your interest rate can change. This guide delves into the Annual Percentage Rate of Charge (ARPC) and explains everything you need to know.

Let’s explore APRCs in detail.

What is APRC on a Mortgage?

The APRC is the amount in interest your mortgage will cost you each year.

When outlining your APRC in documentation the lender must make some assumptions including:

• You maintain the mortgage for the term you initially take out
• You keep up with all mortgage payments
• You do not make overpayments on your mortgage

Normally, your documentation will show the APRC in stages, broken down by year across the mortgage term. This is because the amount of interest you pay in the earlier stages of the mortgage are higher compared to later stages.

The reason your interest payments drop over time is because each year you will be paying a portion of the capital, reducing the outstanding balance on your mortgage, and reducing the value of interest that can be charged.

This does not consider any rate changes you might incur if you remortgage, or the Bank of England changes the base rate, and you are on a tracker mortgage. The APRC is displayed to outline your interest payment at the time the document is generated

How is APRC Calculated?

In broad terms, the APRC is calculated using the abovementioned assumptions and provides you a breakdown of the interest cost over the years you hold the mortgage.

There are factors that can alter this APRC such as mortgage arrangement fees being added to your loan.

You will likely find the APRC outlined at the outset changes after your deal term ends. This is because you are likely to be given an introductory rate such as a fixed rate or tracker rate for a period of time at the beginning of the mortgage.

If you do not remortgage onto a new deal when your current deal ends, you will automatically be moved to a lender’s Standard Variable Rate (SVR). The SVR is typically much higher than the deal rates lenders offer, and you will find the APRC amount is higher in most cases outside of your deal term.

What is a Good APRC for a Mortgage?

A good APRC is a percentage rate that is competitive in the mortgage market and is affordable for you.

There is no gold standard or specific APRC you should be aiming for, instead you should be concerned about finding the lowest APRC for your personal situation.

For example, if you have a bad credit score and your interest rates are higher to reflect the risk to the lender, you may find your APRC is higher compared to your neighbour who has a good credit score.

With that said, your APRC could still be a good APRC as it is the lowest you could achieve with your credit profile.

Where is APRC Shown in Mortgage Documents?

An EU regulation called the Mortgage Credit Directive stipulates a lender must show your APRC clearly in your documentation.

The EU directive was carried over after Brexit and enshrined in British law after the UK left the EU. Like most financial directives, the legislation remains the same after Brexit and lenders must still comply with the Mortgage Credit Directive (MCD).

The MCD instructs lenders to provide a specific document as part of your mortgage offer known as the European Standardised Information Sheet (ESIS).

The ESIS as the name suggests is a generic illustration document that is standardised across all lenders operating in the EU. In other words, your sheet will look the same if you have a Lloyds Bank mortgage or a Santander mortgage.

Fixed Rate Mortgages

When you take a fixed rate mortgage, the APRC will be straightforward showing your interest charge alongside your fixed rate.

You should also have a secondary APRC to show the amount of interest you pay when the rate ends, and you are moved to the SVR.

Because the Standard Variable Rate is set at a lender’s discretion, the amount shown in the APRC may be different compared to when your deal actually ends as the SVR may have changed.

This secondary rate is calculated at the SVR at the time your mortgage is offered, and you should use it as a rough indication rather than a concrete figure,

Variable Rate Mortgages

Variable Rate mortgages and tracker rate mortgages can change over time, even over the time you have a mortgage deal.

This can make it challenging for a lender to calculate an accurate APRC because no one has a crystal ball and there is a chance your APRC will change over time.

To combat this the Mortgage Credit Directive stipulates lenders must provide APRCs in a format that roughly reflects what a change in your headline rate will do to your annual interest calculation.

This figure will be detailed as an APRC2 and is designed to give added transparency about your APRC should your interest rate change.

The APRC2 figure can be alarming as banks must try to use a worst-case scenario figure. Be wary when reading this as it is only the best estimate a lender can make and may not be at all representative of the APRC even if your interest rate does go up.

Why Do Mortgage Lenders Give an APRC?

The idea behind APRC is to give borrowers greater transparency.

Mortgages can be a minefield of interest rates, fees and charges and it has been historically difficult for borrowers to gauge how much a mortgage will cost them.

The problem with this difficulty is most borrowers want to know how much they are borrowing and how much it is going to cost to borrow that money.

Although not at all perfect, the Mortgage Credit Directive takes steps toward making that clearer and the idea is to at least give borrowers a headline figure of how much they can expect a mortgage to cost each year.

Reading Your Documentation

You may still be confused when reading your European Standardised Information Sheet and it is not uncommon for people to have questions about the information displayed.

Before accepting your mortgage offer it is a good idea to read through all your documentation at least twice and make a note of any points you are unsure about.

If you are using a mortgage broker, you will be able to call them and run through all the details you want to check. They will also be able to provide additional information or insight, particularly if you have a APRC you were not expecting.

Only once you have read and understood your mortgage documentation should you enter into a mortgage agreement. Remember a mortgage is a longstanding financial commitment in most cases and is also likely to be the biggest financial agreement you enter into.

It is important you are:

• Comfortable you can afford the mortgage
• In full knowledge about the product you are taking
• Able to understand potential outcomes if your interest rate changes

In short, as exciting as it might be to receive your mortgage offer, make sure you read through all your documentation carefully.

Speak to a Mortgage Expert

While getting a mortgage and owning a property can be the most exciting moment of your life, it can also be the most impactful and daunting experience. Having a mortgage broker will enable you to find the best lender for your personal situation and relieve stress as they hold your hand every step of the way.

Using a mortgage broker can transform your mortgage journey into a stress-free and enjoyable process.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers provides fee free mortgage advice. No client fee is charged at any stage of the process.

Contact Boon Brokers to book your mortgage consultation today.