The annual percentage rate, or APR, is a standardised way of showing the overall cost of a mortgage. Unlike the headline interest rate, the APR factors in compulsory charges such as arrangement fees, so it gives you a more complete picture of what you will actually pay. Lenders are legally required to display the APR alongside any advertised rate.
APR is most useful for comparing mortgage deals on a like-for-like basis. A mortgage with a lower headline rate but a large arrangement fee might end up with a higher APR than one with a slightly higher rate but no fee. This makes APR a better comparison tool than the interest rate alone.
However, APR has limitations. It assumes you will keep the mortgage for the entire term at the same rate, which rarely happens in practice — most borrowers remortgage every two to five years. For this reason, many advisers also look at the total cost over the initial deal period rather than relying solely on APR.
Mortgage A has an interest rate of 3.99% and a £1,500 arrangement fee. Mortgage B has an interest rate of 4.19% and no fee. When you calculate the APR, Mortgage A might come out at 4.3% while Mortgage B sits at 4.2%, meaning Mortgage B is actually cheaper overall despite its higher headline rate.
Key Points
- APR includes the interest rate plus mandatory fees, giving a fuller cost picture
- Lenders must display the APR by law when advertising mortgage products
- It is useful for comparing deals but assumes you keep the mortgage for the full term
- A lower headline rate does not always mean a cheaper deal once fees are included
- For short-term comparisons, also consider the total cost over the initial deal period