At the start of the process, comparing the cost of mortgages can look a bit daunting. As well as deciding between tracker mortgages, discount mortgages and fixed rates, and working out whether to go for repayment mortgages or interest-only deals, there are various fees that can add to the overall cost of a home loan.
One way to make comparisons is to use the APRC figure. There are still a few caveats you need to bear in mind, but it does make things slightly easier.
APRC stands for Annual Percentage Rate of Charge, and should not be confused with APR. It shows you the total cost of a mortgage, including fees, over the entire term of the loan (usually 25 to 30 years).
Lenders often use headline-grabbing rates that highlight the competitiveness of their mortgages but it can be a false economy if you choose a mortgage that’s very competitive for a couple of years only to end up being much more expensive for the rest of the mortgage term.
For example, take a 2-year fixed rate mortgage that comes with an introductory rate of 1.99% before reverting to the lender’s standard variable rate (SVR) of 4.19% for the next 23 years. After including a booking fee of £999, the APRC works out at 3.7%.
APRC was introduced by the Financial Conduct Authority (FCA), the regulator, in 2016. Mortgage lenders, brokers and comparison sites must now display products’ APRCs.
They give a more realistic view of how much mortgages will cost over the long term. Alongside the affordability checks that lenders have to carry out, they also help borrowers avoid taking on debt that they later find they can’t manage.
The APRC is not useful for all borrowers, though.
For instance, if you take out a 5-year fixed rate mortgage and then jump to another deal when the five years is up, you’ll never find yourself on your original lender’s SVR. That means the higher costs included in the original APRC figure would have been irrelevant.
APRC matters only if you stick with a mortgage and never switch – but you are often better off switching when a promotional interest rate runs out.
And don’t forget those fees. The APRC relates to the overall cost of a long-term deal including the initial set-up costs. If you end up switching mortgages every few years, you will avoid reverting to lenders’ more expensive borrowing rates but you could find yourself hit by arrangement fees every time you take out a new deal.
In some cases, it’s cheaper to pick a fee-free mortgage, even if the interest rate is higher.