Interest Rates V APR

"Current account" mortgages

For there to be a significant demand for such products I reckon that a prerequisite is that most individuals understand the mechanics of mortgage products better than they do now in order to appreciate the advantages of "current account" mortgages, tracker mortgages etc. For a variety of reasons, I don't believe that this is the case today. Hopefully, as consumers become more educated in this field demand for better value and more equitable products will increase and the financial institutions will cater for this demand.

Re: "Current account" mortgages

Hi Observer,

I'd love to see Current Account mortgages here. However, I'm not optimistic that they're on their way here anytime soon. CM makes a very valid point - the target market must understand and appreciate the benefits of such flexibility for it to sell in big numbers.

I'm guessing here but I'd imagine that a current account mortgage requires a fairly advanced IT system to back it up. So there's an expense unless some lender wants to use a UK system.

If I was a lender, I'd think long and hard before committing substantial resources to launch a mortgage product into a market which (a) is small, (b) provides the Irish Nationwide with plenty of residential mortgage business despite the fact that they calculate interest annually and add rate loadings in unusual circumstances, and yet (c) doesn't provide Tusa with enough business to survive despite the fact that they had some excellent rates.

Liam D Ferguson
www.ferga.com

Comaring APR's and CPT

Just been comparing interest rates at:

www.finfacts.com/Private/...rt_var.htm

I am still uncertain about a couple of things:

Let's look at the cheapest variable rate APR that's quoted, AIB Stand'd Var'ble at 3.3% this works out at a CPT of €5.69

Now, look at First Active 6mth Dis Var, APR 3.5% (higher than AIB) but the lowest CPT of €531.00

Okay, now how can a lower APR mean a higher CPT over 20 years? Based on the APR explanation as ANNUAL PERCENTAGE RATE in this forum, it just doesn't make sense to me. What is making the difference?

Also Permanent TSB's one year fixed rate new business looks fairly competitive at a CPT of €5.34, but again APR is currently higher (3.5%) than AIB. So why is it that you always hear that "AIB has the cheapest rate on the market"???

www.finfacts.com/Private/...rt_1yr.htm

> Comaring APR's and CPT

adrian,
Your question is an excellent one and highlights the reason why it is important to look at all comparitive rates in addition to looking at other policies of any given lender, as Liam said earlier.
To look at your example: The CPT is based on the advertised rate. The APR must take into account what the cost will be over the Lifetime of the mortgage. This means factoring in all known costs at the time of quoting the APR. So in the case of Permanent tsb and First Active products you have quoted the APR works out the cost of borrowing during the initial 'discounted period' and after the discounted period where the loan reverts back to the Standard Variable Rate. The APR will also factor in 'set-up' or 'redemption charges', if any.
The APR is the Cost of Credit and is for comparitive purposes. The CPT is to help you work out what your monthly payments will be. APR and CPT are not comparible in themselves but, in a comparison such as the one you outlined, questions should be raised as to comparing other cost factors which a lender may have. This would be further highlighted in all loans if ALL loans had to have Payment Protection Insurance and where different lenders charged different premia, again the APR would highlight this while the Cost Per Thousand would not change. As it currently stands Insurance Premia is not taken into account when calculating the APR. Nor are penalty charges for being in arrears.
The EU are currently considering introducing a 3rd Cost/Interest Indicator. This will give us better information and/or more confusion! Depending on your viewpoint.

BG

Comparing APR's and CPT

Thanks BG

I contacted Permanent TSB who explained that the CTP quoted only applied for the first year. After that it depends on the rate. Here's what they said when I asked a question about their CTP figure for a 1 yr fixed rate discount over 25 yrs:

"Thank you for your recent email. The figure quoted related to our 1 year
fixed discounted rate. It would depend after that year, what our rates our.
If you choose to go on this rate, you will receive correspondence after the
1st year of your mortgage and you will be given a breakdown of what our
rates are at that time. You then choose from this as to what rate you wish
to avail of."

To be honest, when talking about CPT I think that it's a little misleading when they don't explicitly say this when quoting on websites etc. My take on this is not to use CPT to compare mortgage products, when one of the products is a discount type product.

Simpe explanation of APR

This explanation was posted by burgessbrendan elsewhere:



APR is the true rate of interest on a loan.

If you borrow €100 and pay €12 interest at the end of the year, the APR is 12%.

Example
You borrow €100,000 from a bank.
The rate of interest is 3% calculated monthly.
3% is €3000
One month’s interest is €250 ( 3000/12)
At the end of January you will owe €100,250
In February, you will be charged interest on the €250 as well as on the €100,000.
So February’s interest is €250.625

At the end of the year, you will owe €3040 interest so the APR is 3.04%
If the interest is calculated daily instead of monthly, you will owe €3045 interest.

With interest rates at 3%, there is very little difference between flat rates and APR. And it doesn’t matter much if they charge it daily or monthly.

But a 10% flat rate charged monthly is 10.47% and 10.5% if charged daily.

Why do lenders with the same APRs have different cost per thousand?
The APR must also include any charges which the lender imposes, so there may be additional charges. Of course, one lender might be miscalculating the APR.

Another thing to watch out for is term of the loan. A 30 year loan at 3% will have a lower cost per thousand as a 20 year loan at 3%.

So should I focus on cost per thousand?
No. Consider both.

The cost per thousand will tell you what your repayments will be in hard cash every month. This will vary depending on the term of the loan. As the cost per thousand includes an element of capital repayment, it is not the true “cost”. The true cost is the interest element.

The APR will tell you the true cost and will allow you compare loans over different terms.