Interest rates
Internal Rate of Return (IRR)
The Internal Rate of Return is not a term that most people
will be familiar with, as it is not usually quoted by lenders.
IRR is largely the same as APR, in as much that it offers
a way of measuring the total annual costs of a mortgage
loan. Like APR, it also takes into account any additional
fees and costs that are incorporated into your payments,
as well as any introductory offers, and factors these in
to give an average annual rate of interest payable over
a period of time.
Although it is still an imperfect measure due to the impossibility
of incorporating future changes in interest rates into the
calculation, it does have one key point in its favour over
APR as a measure for assessing mortgage products. For any
product, the Internal Rate of Return can be calculated over
any period of time that you like. This means you can use
a calculator like the one on this site to compare the averaged
out repayments over any period of time that you like, therefore
allowing you to assess which mortgage would be better value
in a variety of circumstances that may occur in future.
It also allows you to factor in any redemption penalties
that would be payable within the period that you have chosen
as the likely term of the mortgage.
Both APR and the Internal Rate of Return are useful measures
for an initial comparison of mortgage products, but you
should always look at the bigger picture and consider the
rest of the product features and any other factors that
may influence your decision.
