What is the mortgage APR?

Annual percentage rate types

The APR, or Global Effective Annual Rate, is a rate provided by your bank from your first loan simulation. This rate includes all the costs related to the subscription of a mortgage to allow you to evaluate the total cost of your loan.

The APR is an indicator that is expressed as an annual percentage of the amount borrowed. It is essential because it can allow you to objectively compare several credit offers for the same amount borrowed.

Since the end of 2016, the APR has replaced the TEG (Global Effective Rate) as an indicator of the total cost of a loan, as it is considered to be more representative of real costs and more precise.

Costs are taken into account

The APR includes all the costs generated when subscribing to a mortgage, i.e.:

  • Bank interest determined using the nominal credit rate;
  • The cost of borrower insurance ;
  • Administrative fees paid to the bank;
  • Any administrative fees paid to an intermediary, such as a broker (we then speak of brokerage fees);
  • Guarantee costs: mortgage or surety ;
  • The costs of the valuation of the property carried out by a real estate agent if necessary;
  • All other costs necessary to obtain your loan: opening and maintaining a bank account, purchase of shares, etc.

An indicator to compare credit offers

As we have seen, interest is not the only cost to be taken into account to assess the total cost of a loan: comparing only the nominal rate of several loan offers will therefore not be optimal.

The APR is therefore an essential indicator for borrowers wishing to estimate the cost of their mortgage and compare offers for the same amount borrowed since it takes into account all the costs related to a mortgage!

Indeed, as the calculation method is the same for all lending institutions, the APR is a reliable and objective indicator that will allow you to put different loan offers in competition and therefore to choose the best contract.

APR and current wear rate

According to the law, the APR of a mortgage must imperatively be lower than the rate of wear in force. This wear rate, defined by article L314-6 of the Consumer Code, is set by the Banque de France each quarter and is published in the Official Journal.

The purpose of the usury rate is to protect consumers and to prevent them from borrowing money at reckless rates. Thus, if your APR exceeds the wear rate in force, your credit application will be automatically refused since your lending institution would then risk a fine of €45,000!

Fixed APR vs reviewable APR

Depending on your profile, your budget, and your real estate project, it is possible to choose between two types of TAEG:

  • The fixed APR: your monthly loan payments are then constant throughout your repayment. You thus benefit from a long-term vision of your budget and the expenses to be planned each month.
  • Variable or revisable APR: this time, your APR is indexed to a benchmark indicator (usually the Euribor indicator). Your monthly loan payments can therefore increase or decrease during the repayment of your credit.

Lower your APR

To lower the APR – and therefore the cost – of your mortgage, it is possible to play on two of these main components:

  • Administrative fees: it is often possible to negotiate these with the bank, especially if you have a good profile;
  • Loan insurance.

Choosing a delegation of insurance is indeed a good way to lower an APR since borrower insurance can represent up to a third of the total cost of a loan!

By taking out loan insurance with an independent company, you will not only benefit from a 100% personalized contract at a competitive rate, but you will also have more room to negotiate your coverage levels.

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By Cary Grant

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