The APR: understanding the true cost of your mortgage

The APR: understanding the true cost of your mortgage

To facilitate the comparison of credit offers, the law requires banks to include in all their loan proposals the Annual Effective Rate (APR). The latter takes into account the costs related to credit, which increase the real cost of any loan.

The principle of the Annual Effective Annual Rate

The Global Effective Annual Rate (APR) is the reference for all loans to individuals. Indeed, the law has made it mandatory to publish it in each loan offer. Expressed as an annual percentage of the amount of credit, the APR is an indicator representative of the real cost of credit. Thus, it is useful for comparing different offers.

The elements are taken into account in the calculation of the APR

The APR takes into account all the amounts to be paid apart from the repayment of the amount borrowed. He understands:

  • interest on credit.
  • Interest generated by interest (it has an “actuarial” character).
  • Application fee.
  • The cost of mandatory borrower insurance.
  • Guarantee costs (deposit, mortgage, etc.).
  • Account maintenance fees.
  • Real estate valuation fees.

To note

The APR is calculated on an annual basis to allow comparison between loans of different durations. It must not exceed the legal wear rate set by the Banque de France.

Example

If you borrow €10,000 at the rate of 2% over one year, you must repay €10,200. However, by adding 50 € of miscellaneous costs, the total cost of your credit is 250 € or 2.5% over one year. The APR here is 2.5%.

The limits of the APR

The APR has the advantage of being practical and easy to use to estimate the real cost of a loan. However, it does not take into account the qualitative selection criteria when taking out a mortgage. Thus, it does not include the possibility of making or not making early repayments, increasing or reducing monthly payments, or even postponing them. It is up to you to compare these elements and not to rely solely on the APR.

To know

The APR of a variable rate loan is generally calculated on the starting rate. It is therefore not significant since the benchmark credit rate is expected to change at each revision period.

he APR has the advantage of being practical and easy to use to estimate the real cost of a loan. However, it does not take into account the qualitative selection criteria when taking out a mortgage. Thus, it does not include the possibility of making or not making early repayments, increasing or reducing monthly payments, or even postponing them. It is up to you to compare these elements and not to rely solely on the APR.he APR has the advantage of being practical and easy to use to estimate the real cost of a loan. However, it does not take into account the qualitative selection criteria when taking out a mortgage. Thus, it does not include the possibility of making or not making early repayments, increasing or reducing monthly payments, or even postponing them. It is up to you to compare these elements and not to rely solely on the APR.

By aamritri

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