E
Elcato
Guest
Can someone explain to me what is the difference between Interest Rates v APR ? - I'm a complete novice to this !
C
CM
Guest
It depends on the institution - as far as I know most (all?) banks calculate interest daily. I think that Building societies traditionally calculated interest annually but most have moved to monthly or daily calculation of interest now. Irish Nationwide is the only institution which still calculates interest annually as far as I know - at least they were still doing this up to a year ago. The excuse they offered at the time was that their computer systems had not yet been reprogrammed to do otherwise. :rolleyes EBS moved from annual to monthly calculation of interest in the last few years. If you are in doubt ask and persist even if your query is initially met with blank stares or you are offered the same explanation that the EBS gave a friend of mine - "it's a big complicated formula". :lol
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Emma
Guest
CM,
I'm sorry if I sound stupid
, but why do they mention APR if they calculate it on the interest rate?. I can't get my head around this.
I'm sorry if I sound stupid
, but why do they mention APR if they calculate it on the interest rate?. I can't get my head around this.
C
CM
Guest
APR
I'm not sure how to make this any clearer! Forget about nominal rates and concentrate on the quoted APR which represents the true cost of a loan (in the case of deposits ignore the nominal rate and concentrate on the CAR - Compound Annual Rate).
As an example, in general a nominal rate with interest calculated annually will result in higher APR than if the same nominal rate is used but the interest calculated monthly or daily. Other factors and charges are also taken into account when calculating the APR such that APR reflects the true cost of a loan and is a figure which can be used to compare loans on a like for like basis. Comparing nominal rates in this way is meaningless.
Does this make any more sense...?
I'm not sure how to make this any clearer! Forget about nominal rates and concentrate on the quoted APR which represents the true cost of a loan (in the case of deposits ignore the nominal rate and concentrate on the CAR - Compound Annual Rate).
As an example, in general a nominal rate with interest calculated annually will result in higher APR than if the same nominal rate is used but the interest calculated monthly or daily. Other factors and charges are also taken into account when calculating the APR such that APR reflects the true cost of a loan and is a figure which can be used to compare loans on a like for like basis. Comparing nominal rates in this way is meaningless.
Does this make any more sense...?
S
Sarah Wellband
Guest
Re: APR
The best way to compare lenders is to ignore the APR and the interest rate and look at the cost per thousand (CPT). Multiple this by the mortgage amount for the exact monthly payment. For example £150,000 over 25 years at 3.55% (EBS discounted variable rate) gives a CPT of 5.03. 150 x 5.03 = £754.50 per month. All lenders publish their CPT's for their rates on their websites; finfacts also quote CPT's over 20 years for all lenders.
The best way to compare lenders is to ignore the APR and the interest rate and look at the cost per thousand (CPT). Multiple this by the mortgage amount for the exact monthly payment. For example £150,000 over 25 years at 3.55% (EBS discounted variable rate) gives a CPT of 5.03. 150 x 5.03 = £754.50 per month. All lenders publish their CPT's for their rates on their websites; finfacts also quote CPT's over 20 years for all lenders.
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Emma
Guest
Sarah,
Thanks, unfortunately I'm not in this business & I find it hard to understand the jargon, obviously comes easier to others. How did you get 5.03, maybe you could explain the calculation to me ?
Tks,
Emma
Thanks, unfortunately I'm not in this business & I find it hard to understand the jargon, obviously comes easier to others. How did you get 5.03, maybe you could explain the calculation to me ?
Tks,
Emma
C
CM
Guest
APR
Sarah - there was a about the pros and cons of using CPT versus APR when comparing loans. I tend to lean towards CPT but Brendan seems to prefer APR. Anyway - your example is fine except that you use the one year discounted rate which we all know is <!--EZCODE ITALIC START--> not<!--EZCODE ITALIC END--> a good indication of the normal cost in the longer term. Better to use the standard variable CPT and treat the one year discount savings as the once off bonus that it is.
Emma - don't worry, stuff like this is not obvious - apologies if I made it sound like it is! I'm not an industry insider/professional and only learnt about stuff like this through practice.
Sarah - there was a about the pros and cons of using CPT versus APR when comparing loans. I tend to lean towards CPT but Brendan seems to prefer APR. Anyway - your example is fine except that you use the one year discounted rate which we all know is <!--EZCODE ITALIC START--> not<!--EZCODE ITALIC END--> a good indication of the normal cost in the longer term. Better to use the standard variable CPT and treat the one year discount savings as the once off bonus that it is.
Emma - don't worry, stuff like this is not obvious - apologies if I made it sound like it is! I'm not an industry insider/professional and only learnt about stuff like this through practice.
S
Sarah Wellband
Guest
Unfortunately not, Emma. We are supplied with new CTP sheets as and when interest rates change and work from them. One lender I just spoke to said they just feed the new interest rate into their computer. The actual formula for calcuating the APR is laid down in the 1995 Consumer Credit Act but is horribly complex.
S
Sarah Wellband
Guest
Point taken CM - std. variable rate 4.6% or £769.50 on £150k over 30 years. OK?
C
CM
Guest
Pedantic me
Fair enough Sarah. Just to clarify (to Emma) the cost per thousand figure depends on the mortgage term so the example quoted by Sarah will <!--EZCODE ITALIC START--> only<!--EZCODE ITALIC END--> work for a 30 year term. The relevant CPT figures for the arguably more common case of a 20 year term are available from Finfacts.
Is this making a bit more sense or are we confusing you completely at this stage!
Fair enough Sarah. Just to clarify (to Emma) the cost per thousand figure depends on the mortgage term so the example quoted by Sarah will <!--EZCODE ITALIC START--> only<!--EZCODE ITALIC END--> work for a 30 year term. The relevant CPT figures for the arguably more common case of a 20 year term are available from Finfacts.
Is this making a bit more sense or are we confusing you completely at this stage!
E
Emma
Guest
CM/Sarah,
No it does make more sense I think I've got a better handle on it now, but I'd love to know how they work out the CPT figure!. Would you recommend going for a 20/25/30 year mortgage ?
Tks,
Emma
No it does make more sense
I think I've got a better handle on it now, but I'd love to know how they work out the CPT figure!. Would you recommend going for a 20/25/30 year mortgage ?Tks,
Emma
C
CM
Guest
Mortgage term
Didn't I tell you it was a "big complicated formula"! :lol Seriously, perhaps somebody (Liam perhaps?) could explain the mechanics of the CPT and/or APR calculations?
As regards mortgage term the shorter the better! The longer the mortgage runs the more interest you pay. Karl Jeacle's mortgage calculator (instructions here) is great for illustrating how different variables (including term) affect total mortgage cost. There's no harm in starting with, say, a 20 year term and then making "accelerated repayments" (e.g. foregoing rate reductions and leaving your repayment above what would normally be charged and/or making lump sum capital repayments whenever possible) in order to reduce the effective term as you go. This is possible without penalty with most annuity/repayment mortgages other than fixed rate mortgages which normally charge penalties/fees for breaking the fixed rate agreement and/or early redemption.
There's more on this and related topics in the and elsewhere on AAM and the archives.
Didn't I tell you it was a "big complicated formula"! :lol Seriously, perhaps somebody (Liam perhaps?) could explain the mechanics of the CPT and/or APR calculations?
As regards mortgage term the shorter the better! The longer the mortgage runs the more interest you pay. Karl Jeacle's mortgage calculator (instructions here) is great for illustrating how different variables (including term) affect total mortgage cost. There's no harm in starting with, say, a 20 year term and then making "accelerated repayments" (e.g. foregoing rate reductions and leaving your repayment above what would normally be charged and/or making lump sum capital repayments whenever possible) in order to reduce the effective term as you go. This is possible without penalty with most annuity/repayment mortgages other than fixed rate mortgages which normally charge penalties/fees for breaking the fixed rate agreement and/or early redemption.
There's more on this and related topics in the and elsewhere on AAM and the archives.
L
Liam D Ferguson
Guest
Re: Mortgage term
Hi Emma & CM,
I hate to disappoint you but I don't actually know the mathematical formula for working out CPT or APR.
I cheat - I have a piece of software installed on my PC - I can input a mortgage amount, term and rate and it will spit back the repayments and other relevant bits of info.
Emma - I am in absolute agreement with CM on the "shorter the better" principle. A longer-term mortgage will have lower monthly repayments but will cost more over the longer term. Set your mortgage term as short as you can comfortably afford the monthly repayments.
Regards,
Liam D Ferguson
www.ferga.com
Hi Emma & CM,
I hate to disappoint you but I don't actually know the mathematical formula for working out CPT or APR.
I cheat - I have a piece of software installed on my PC - I can input a mortgage amount, term and rate and it will spit back the repayments and other relevant bits of info.
Emma - I am in absolute agreement with CM on the "shorter the better" principle. A longer-term mortgage will have lower monthly repayments but will cost more over the longer term. Set your mortgage term as short as you can comfortably afford the monthly repayments.
Regards,
Liam D Ferguson
www.ferga.com
O
Observer
Guest
APR and all that
The APR concept is relatively simple. Start with the basics: an APR of 10% means if I borrow £100, I repay exactly £110 exactly one year later. Thats why they call it ANNUAL PERCENTAGE RATE!
Now lets look at rates over other periods. Suppose I have a £100 overdraft at the start of year at an APR of 10%. In theory, if I make no other transactions on the a/c (inc fees charges etc.) I should owe exactly £110 at years end. How is this done if interest is charged, say, quarterly? Well, its not simply a question of paying 2.5% interest per quarter. Why? Because in quarter 2 I'd end up paying interest on £100 + £2.50 (total interest for the quarter being £2.5625, in quarter 3 I pay interest on £100 +£2.5625 + £2.50 etc.
To get the true quarterly rate I must convert the interest rate to the format 1+i where i is the decimal equivalent of the APR. In this case APR =10% = 0.1 so my 1+i format = 1.1 (which is the number I must multiply the year start debt by to get the year end debt.) Then get the fourth root of 1.1 (or the square root of the square root of 1.1) to get the 1+i factor for one fourth of a year. This is 1.024113589.... Therefore the true interest rate per quarter is 2.4113689%
You can check this as follows:
Quarter Opening balance Interest Closing Balance
1 100 2.411359 102.411359
2 102.411359 2.469505 104.880864
3 104.880864 2.529054 107.409918
4 107.409918 2.590039 109.999957
Correct apart from rounding errors; all figures shown to 6 decimal places.
Similarly the true daily rate is (the 365th root of 1+i) -1
In this case this is (the 365th root of 1.1) - 1
= 1.000261158 - 1
= .000261158
= .0261158% per day.
The Excel formula for 365th root of 1.1 is =1.1^(1/365)
Lesson 2 is how to calculate the APR when you know the repayments. Thats for honours students!
The APR concept is relatively simple. Start with the basics: an APR of 10% means if I borrow £100, I repay exactly £110 exactly one year later. Thats why they call it ANNUAL PERCENTAGE RATE!
Now lets look at rates over other periods. Suppose I have a £100 overdraft at the start of year at an APR of 10%. In theory, if I make no other transactions on the a/c (inc fees charges etc.) I should owe exactly £110 at years end. How is this done if interest is charged, say, quarterly? Well, its not simply a question of paying 2.5% interest per quarter. Why? Because in quarter 2 I'd end up paying interest on £100 + £2.50 (total interest for the quarter being £2.5625, in quarter 3 I pay interest on £100 +£2.5625 + £2.50 etc.
To get the true quarterly rate I must convert the interest rate to the format 1+i where i is the decimal equivalent of the APR. In this case APR =10% = 0.1 so my 1+i format = 1.1 (which is the number I must multiply the year start debt by to get the year end debt.) Then get the fourth root of 1.1 (or the square root of the square root of 1.1) to get the 1+i factor for one fourth of a year. This is 1.024113589.... Therefore the true interest rate per quarter is 2.4113689%
You can check this as follows:
Quarter Opening balance Interest Closing Balance
1 100 2.411359 102.411359
2 102.411359 2.469505 104.880864
3 104.880864 2.529054 107.409918
4 107.409918 2.590039 109.999957
Correct apart from rounding errors; all figures shown to 6 decimal places.
Similarly the true daily rate is (the 365th root of 1+i) -1
In this case this is (the 365th root of 1.1) - 1
= 1.000261158 - 1
= .000261158
= .0261158% per day.
The Excel formula for 365th root of 1.1 is =1.1^(1/365)
Lesson 2 is how to calculate the APR when you know the repayments. Thats for honours students!
C
CM
Guest
APR
Do you know how "other charges" are also factored into the APR calculation? Is it simply a case of any regular charges of £x per month or up-front charges of £y being worked into the equations?
Do you know how "other charges" are also factored into the APR calculation? Is it simply a case of any regular charges of £x per month or up-front charges of £y being worked into the equations?
O
Observer
Guest
More APR
Basically, yes. Charges are treated just as extra repayments and accounted for accordingly.
Basically, yes. Charges are treated just as extra repayments and accounted for accordingly.
L
Liam D Ferguson
Guest
Re: More APR
Hi Observer,
This is most interesting. Your definition of APR suggests that it takes account of charges, fees and frequency of calculation of interest. That's good.
But it does not and cannot account for future changes in fees or margin. Many (most) lenders have recently proved that they are not averse to increasing their margin on a loan when they can comfortably get away with it (like when rates are dropping so consumers aren't complaining). Such practices would obviously not have been reflected in the APR's quoted at the point of sale. That's bad.
My point is that, while it's been said here on AAM that APRs are the only true way to compare mortgage and other loan products, I would say that it should not be relied on too heavily as it is as flawed as the rest and that consumers should look at a number of factors <!--EZCODE ITALIC START--> not just APR<!--EZCODE ITALIC END-->.
Regards,
Liam D Ferguson
www.ferga.com
Hi Observer,
This is most interesting. Your definition of APR suggests that it takes account of charges, fees and frequency of calculation of interest. That's good.
But it does not and cannot account for future changes in fees or margin. Many (most) lenders have recently proved that they are not averse to increasing their margin on a loan when they can comfortably get away with it (like when rates are dropping so consumers aren't complaining). Such practices would obviously not have been reflected in the APR's quoted at the point of sale. That's bad.
My point is that, while it's been said here on AAM that APRs are the only true way to compare mortgage and other loan products, I would say that it should not be relied on too heavily as it is as flawed as the rest and that consumers should look at a number of factors <!--EZCODE ITALIC START--> not just APR<!--EZCODE ITALIC END-->.
Regards,
Liam D Ferguson
www.ferga.com
C
CM
Guest
APR
Yes - it's worth noting that the APR represents the true cost of the loan <!--EZCODE ITALIC START--> at that specific point in time<!--EZCODE ITALIC END-->. It is impossible to predict what way rates and margins (other than with trackers with a built-in maximum margin guarantee) will go in the future.
What additional factors did you have in mind Liam? Past "performance" on margins would be one I presume?
Yes - it's worth noting that the APR represents the true cost of the loan <!--EZCODE ITALIC START--> at that specific point in time<!--EZCODE ITALIC END-->. It is impossible to predict what way rates and margins (other than with trackers with a built-in maximum margin guarantee) will go in the future.
What additional factors did you have in mind Liam? Past "performance" on margins would be one I presume?
L
Liam D Ferguson
Guest
Re: APR
Yes that's a very important one. Also track record on speed of passing on rate changes. And then issues appropriate to an individual's particular requirements such as flexibility of product to accept lump sum repayments, increased monthly repayments, payment holidays etc. If one is choosing a fixed rate, the lender's formula for calculating breakage penalties (although again this is "point in time" as most lenders allow themselves discretion on calculation of such penalties.
Yes that's a very important one. Also track record on speed of passing on rate changes. And then issues appropriate to an individual's particular requirements such as flexibility of product to accept lump sum repayments, increased monthly repayments, payment holidays etc. If one is choosing a fixed rate, the lender's formula for calculating breakage penalties (although again this is "point in time" as most lenders allow themselves discretion on calculation of such penalties.
O
Observer
Guest
APR
Liam,
Fair point. Obviously APR can change and if it does, then this must be considered as an other factor. But apart from cost, which APR (at any given point in time) is a true reflection of, I don't really see any other hugely significant factors. There are minor things such as policies on arrears, ease of remortgaging etc., but basically, its a commodity product and cost is king.
This is even more so with the tracker mortgage, where APR is essentially defined (if not fixed!) over the entire life of the mortgage.
Now if institutions started to offer really innovative stuff like current account mortgages, then the picture would change. But, I don't see any evidence of this happening............
Perhaps Liam could comment on the demand, if any, for this?
Liam,
Fair point. Obviously APR can change and if it does, then this must be considered as an other factor. But apart from cost, which APR (at any given point in time) is a true reflection of, I don't really see any other hugely significant factors. There are minor things such as policies on arrears, ease of remortgaging etc., but basically, its a commodity product and cost is king.
This is even more so with the tracker mortgage, where APR is essentially defined (if not fixed!) over the entire life of the mortgage.
Now if institutions started to offer really innovative stuff like current account mortgages, then the picture would change. But, I don't see any evidence of this happening............
Perhaps Liam could comment on the demand, if any, for this?