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

Need a secured loan or mortgage? Looking at the annual percentage rate of charge (APRC) is a way of comparing the cost of different loans to find the right one for you.

Need a secured loan or mortgage? Looking at the annual percentage rate of charge (APRC) is a way of comparing the cost of different loans to find the right one for you.

Anelda Knoesen
From the Money team
7
minute read
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Posted 2 JUNE 2021

What is APRC and what does it mean for me?

APRC stands for annual percentage rate of charge. It shows you, as a percentage, the annual cost of a secured loan or mortgage. It brings together all charges (such as fees and other costs), calculated as if you kept your secured loan or mortgage for the full term without changing it. It’s used to compare mortgages and homeowner loans – the types of loan that are secured against your house.

Because some mortgages can offer a lower rate of interest for the first few years, the way the APRC is calculated reflects this, whereas APR uses just one rate. APRC is designed to help show potential borrowers the impact that the different rates and any charges could have over the lifetime of the mortgage.

APRC helps you compare the overall mortgage or secure loan costs from different providers against the same parameters. Some mortgages may have a low interest rate, but by the time you add in all the charges, it could work out more expensive - APRC helps borrowers see that.

How is APRC calculated?

When you take out a mortgage, you’ll probably be offered an attractive introductory rate. This will only last for a set period though, after which you’ll be moved onto the provider’s standard variable rate, which will likely be much higher. The APRC takes both the introductory and long-term interest rate, together with any fees, and calculates a percentage. This shows you what it would cost every year if you had the same mortgage until you paid it off completely.

For example, imagine you’re buying a £150,000 house and have a deposit of £30,000. The APRC will help you compare two possible mortgages for £120,000.

  • Loan A has a starting rate of 0.99% for 24 months, which then increases to a standard rate of 4.99% for 23 years, with set-up fees of £2,366.
  • Loan B has a starting rate of 1.39% for 24 months, then moves to a higher standard rate of 4.75%, with no set-up fees.

At a glance, it’s hard to work out if the lower initial rate compensates for the higher standard rate. Here’s where the APRC allows you to make a comparison. Despite having a lower starting rate, loan A has a 4.5% APRC, while loan B comes in at 4.2% APRC so would be cheaper over the lifetime of the mortgage.

Any homeowner loan, secured loan, mortgage or second mortgage – all different names for loans that are secured against your home – will show an APRC. Don’t forget, there’s a difference between a secured loan, where your home is at risk if you don't keep up the payments, and an unsecured loan where you don’t need to offer any security. 

How useful is the APRC for comparing the cost of mortgages and secured loans?

It depends. The APRC is calculated to assume that you keep the same mortgage/secured loan and provider for the length of the loan and that interest rates don't change. This can make it of limited use as most people won't stay with the same provider. People move home, and many borrowers compare deals when their fixed term comes to an end and remortgage or switch to a more competitive deal. If you’re going to be an active switcher, the initial rate might be of more importance to you than a high APRC. 

However, it can be a useful tool to allow you to see the impact of different interest rates or different fees on the overall cost between different providers.

Say you were looking for a three-year fixed rate mortgage. Any deals you see promoted or quotes you’re given should show:

  • the initial rate – the rate during the three-year fixed period
  • the variable rate – the rate you’d move onto once the three-year deal finishes
  • the APRC – the overall cost for comparison, which takes account of both the initial and the variable rate over the full term of the mortgage.

Being able to see all three rates can help you compare mortgages.

Loans, interest and APRC: how they work together

If you take out a secured loan or a mortgage, you’ll need to pay interest on it. The interest charged depends on:

  • how much you want to borrow
  • how long you want to borrow the money for
  • your individual circumstances, including your credit score

So, while the headline/representative APRC for a loan might be 5%, for example, once the bank takes into account your personal situation and credit history your personal APRC might be 8%.

Mark Gordon

Director of Mortgages, at comparethemarket.com

What our expert says

The difference between the introductory rate, standard variable rate and the APRC should act as a reminder that if you don’t remortgage at the end of an introductory term you’ll roll onto a lender’s standard variable rate, and, over the years, could end up paying thousands of pounds more because of the higher interest charges."

So it’s worth finding out if you’d be eligible for a new fixed rate deal with your current loan provider or another lender before your fixed term ends. If you need help to find the right deal speak to a mortgage broker.”

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

APR (annual percentage rate) is a way of comparing loans or credit and it works in a similar way to APRC. It includes both the interest rate and fees for borrowing each year.

APRC gives you a clear indication of how much the average interest rate and associated fees would come out to on an annual basis, if you kept the loan or mortgage for the whole term.

AER (annual equivalent rate) is what’s used to compare savings accounts. AER works by assuming you’re going to put your savings away for a year. It takes into account any compound interest plus any bonus introductory rates.

How to get a loan with low APRC

Getting a loan with a low APRC is influenced by:

  • Your credit record – to get a loan at the lowest APRC, you’ll need a very good credit history. You can check your credit score for free with the main credit reference agencies:

    Experian
    Equifax
    TransUnion
  • How much you want to borrow – generally, the more you borrow, the lower the rate offered. However, you should only borrow what you can afford to pay back.

  • The length of time you borrow for – mortgages are generally 25 years, but you can find longer or shorter terms. If you’re taking out a mortgage or secured loan, extending the term will drive down your monthly repayments and mean you pay less over the course of the year. But while the monthly payments may be lower, the overall cost of the loan will be higher because you’re borrowing the money for longer and, as a result, paying back more interest.

    Remember the golden rule: borrow as little as possible and pay it back as quickly as possible.

  • The size of your deposit if you’re applying for a mortgage - if you can put down a 40% deposit, you’ll get a lower interest rate than if you have just 5%.
  • The amount of available equity in your property if you’re applying for a secure loan. If you have a lot of available equity in your property, but the loan you’re applying for is a smaller amount, you’ll be less of a risk to your lender so are likely to get a better interest rate.

Frequently asked questions

How do mortgage providers set interest rates?

Loan and mortgage providers tend to set their own interest rates. As well as considering the Bank of England base rate, lenders look at other factors, such as how much competition there is in the market, how much the loan is likely to cost them and what kind of risk the borrower presents.

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

APRC is just one thing to consider when choosing a mortgage or secure loan. There are lots of other factors to think about, such as:

  • How long do you want the mortgage to last?
    A longer term mortgage will give you cheaper monthly repayments, but will mean you pay more overall.
  • Does the mortgage or loan allow you to overpay?
    Some mortgage providers will penalise you for overpaying. If you’re likely to want to overpay, via a lump sum or increased monthly payments, look for a deal that gives you that flexibility.
  • Are there penalties for switching deals?
    Read the small print and make sure you’re not going to be charged if you want to switch your mortgage or leave your existing or potential new mortgage early.
  • How flexible is the mortgage or secure loan?
    For example, can you move your mortgage if you move house? It’s worth thinking about these things before you commit.

Finding the right loan for you

We’re here to make things as straightforward as possible. When it comes to comparing loans, we’ll make it clear what the APRC/APR is, what you need to pay each month and overall. Get a quote and find the right deal for you.

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