Interest rates
Annual Percentage Rate (APR)
Comparing the rates that the lenders charge is not that
easy, unless you have a good grounding in mathematics. Even
with relatively simple products, it's not that easy, never
mind trying to compare the complex interest calculations
on a stepped discount mortgage and a collared cashback mortgage,
for instance. To make matters worse, some lenders calculate
interest daily and others yearly, which can have a huge
impact on the amount you pay back over the life of the loan.
APR goes some way to alleviate this problem. This is the
indicator that lenders are required by the Consumer Credit
Act to provide, in order to allow borrowers to compare the
cost of different loan products. It takes into account the
costs involved in setting up the mortgage, any discount
periods, how often interest is calculated and calculates
what the average rate of interest will be over the life
of the loan.
So why bother looking at the fixed rate or discount period
- surely all you need to do is compare the APR and it's
easy to decide which mortgage to buy?
Not quite. There are flaws with using APR as a comparison
tool.
