Interest Rates and APR - please explain!

The best method is to compare the actual monthly payments. But even that can be mis-leading if discount rates are involved.

Bitstring , from the wonderful person Adrian said

The 'interest rate' quoted is probably for some very limited period, whereas the APR will be for the full duration of the loan (or the lock-in period).

e.g. you can have 0% interest for the first 2 years. You are then committed to paying 10% for the next 5 years (or a significant break cost). The APR (calculated over the 7 years) is somewhere between the two numbers.

Personally I'd ignore the 'shirt term interest rate', unless there was some good reason to believe that 'jam today' was worth the pain of 'starving tomorrow'.

OK, 5.2% quoted per year, almost certainly means 0.4333% per month, which when compounded corresponds to an effective 5.3257% per year, which is rounded to 5.3% for the APR figure. In the absence of, er, "complications", the APR is equal to the effective rate, rounded.

The answer lies in what you've said, these are discount rates, but the APR is an averaged measure of the cost of the loan over its entire lifetime. Typically they will assume the discount rate applies for maybe 2 years, and then the standard rate, which takes over after the discount period, is assumed to apply for the remaining 23 years of what is still regarded as the typical term of 25 years. The effect of the standard rate will outweigh that of the short-term discount rate.

I would add up all the costs over the life of the fix or discount, including all the upfront costs and the monthly repayments, and compare each deal with the alternatives on the same basis.

Amazing how often the very cheap deals are clawed back by a huge upfront fee. The idea I suppose is that the punters simply add this to the mortgage and don't feel the pain. The result though is that someone who kept doing

25-year remortgages every few years might find that after 10 years he owed more than he owed starting out and still had 25 years to go...

Is this "shirt term" type of mortgage as in take the shirt off your back from Shyster Mortgages Inc? :)

Bitstring , from the wonderful person Doug Ramage said

I guess it could be. or it could be my usual typing accuracy ... +/- 1 key position in any direction. After all, if you're going to pass the Turing Test you need to exhibit average levels of human sloppiness.

Are you married? Do you wear a ring? If yes to both, it might help to get an additional ring for symmetry. Then you'll be sure to pass the two ring test. But don't get an additional spouse to go with the ring, unless you're also signing up for the Darwin Test.

Yes

Yes

Got one.

I do

LOL. I doubt I could afford another spouse.

The APR is calculated in almost the same way by everyone. It looks at a typical repayment pattern and uses the premise that a pound owed on any day attracts the same amount of interest.

Many mortgage companies only add the interest onto the account once each year. Their interest rate can be calculated by adding up the year's repayments, dividing by outstanding balance at the start of the year and multiplying by 100. For the APR calculation you have to accept that the outstanding balance can change each month. For many mortgages the outstanding balance does not change much (it will be paid off by some capital investment) so the APR and mortgage rate can be similar. On a repayment mortgage or where their is a change in monthly payments during the year, there can be a bigger difference.

If you want to pay off a mortgage all at once it is not unusual to find the mortgage company will ask for the same amount at different times. If 100k is owing and the mortgage rate is 6%, they will want monthly payments and a lump sum to add up to 106k whether you pay them at the start or near the end of the year.