Mortgage Rates, APRC and Fees Explained
Mortgage advertisements often lead with a low interest rate, but that rate does not show the complete cost of borrowing.
UK home buyers may also need to consider the product fee, mortgage valuation cost, broker fee, early repayment charge and the rate that applies when the initial deal ends.
Simple answer: The initial interest rate helps determine your monthly payment during the deal period. APRC estimates the yearly cost across the full mortgage term, while fees and charges can increase the amount you pay.
Important Numbers on a Mortgage Deal
| Mortgage Figure | What It Means |
|---|---|
| Initial interest rate | The rate charged during the introductory fixed, tracker or discounted period. |
| Initial deal period | How long the introductory mortgage rate lasts, such as two or five years. |
| Follow-on rate | The rate that normally applies after the initial deal ends. |
| APRC | An estimated annual cost covering the mortgage term, including certain fees and rate changes. |
| Product fee | A charge for arranging or accessing the selected mortgage product. |
| Early repayment charge | A possible charge for repaying or changing the mortgage during a restricted period. |
| Total amount payable | An illustration of the total mortgage payments, interest and included charges over the full term. |
What Is a Mortgage Interest Rate?
The mortgage interest rate is the percentage charged by the lender for providing the loan.
On a repayment mortgage, each monthly payment normally includes:
- interest charged on the outstanding mortgage balance; and
- repayment of part of the original amount borrowed.
During the early years of a long repayment mortgage, a larger proportion of the monthly payment may go towards interest because the outstanding balance is still high.
Example Mortgage Payments
| Mortgage | Term | Interest Rate | Approximate Monthly Payment |
|---|---|---|---|
| £250,000 | 30 years | 4% | £1,194 |
| £250,000 | 30 years | 5% | £1,342 |
| £250,000 | 30 years | 6% | £1,499 |
These examples assume a repayment mortgage and that the stated rate remains unchanged for the full 30 years. Actual mortgage rates, payments and charges will depend on the product.
Fixed, Tracker and Variable Mortgage Rates
| Rate Type | How It Works | What Can Change? |
|---|---|---|
| Fixed rate | The interest rate remains unchanged for an agreed deal period. | Payments normally remain stable during the fixed period but can change when it ends. |
| Tracker rate | The rate follows an external rate, commonly the Bank of England base rate, plus an agreed margin. | Payments can rise or fall when the tracked rate changes. |
| Discounted variable rate | A discount is applied to the lender’s variable rate for a limited period. | The underlying lender rate can change, so the payment can also change. |
| Standard variable rate | A variable rate set by the mortgage lender. | The lender may change the rate in accordance with the mortgage terms. |
| Lifetime tracker | A tracker rate that may continue for the full mortgage term. | The payment follows changes to the tracked rate throughout the term. |
The rate type explains how interest is calculated. It does not, by itself, show the complete mortgage cost or whether a buyer will satisfy the lender’s criteria.
Mortgage Deal Period vs Mortgage Term
The mortgage term and the initial deal period are not the same.
Example
A buyer takes a 30-year repayment mortgage with a five-year fixed rate.
- Mortgage term: 30 years
- Fixed-rate period: Five years
- Remaining term after the fix: Approximately 25 years
When the five-year fixed period ends, the mortgage does not end. Unless another arrangement is made, the mortgage normally moves to the follow-on rate stated in the mortgage offer.
Common misunderstanding: A five-year fixed mortgage is normally a long mortgage with the interest rate fixed for five years, not a mortgage that must be fully repaid within five years.
What Is APRC on a Mortgage?
APRC means Annual Percentage Rate of Charge. It estimates the mortgage’s annual cost as a percentage across the full mortgage term.
The APRC calculation can include:
- the initial interest rate;
- the follow-on rate;
- the product or arrangement fee;
- certain compulsory mortgage charges; and
- the timing of payments over the mortgage term.
Lenders must display the APRC on regulated mortgage information. It is also included in the mortgage illustration or European Standardised Information Sheet, known as the ESIS.
Why Is APRC Higher Than the Advertised Rate?
A mortgage may advertise an initial rate of 4.5% but show an APRC of 6.2%. This can happen because the APRC also reflects fees and the higher follow-on rate assumed after the initial deal ends.
Important: APRC assumes the mortgage continues according to the illustration for its full term. If the borrower later changes product, remortgages or repays early, the actual cost can be different.
What Is an ESIS Mortgage Illustration?
The European Standardised Information Sheet provides important information about a proposed regulated mortgage.
It normally includes:
- the mortgage amount and term;
- the initial rate and deal period;
- monthly repayments;
- the rate that follows the initial deal;
- APRC;
- fees included in the mortgage;
- fees payable separately;
- early repayment charges;
- overpayment conditions;
- total amount payable;
- property valuation requirements; and
- possible consequences of missed payments.
Some third-party costs may not be known to the lender and may therefore appear separately or remain excluded from the APRC.
Mortgage Fees Buyers May See
| Mortgage Fee | What It May Cover |
|---|---|
| Product or arrangement fee | The lender’s charge for providing a particular mortgage product. |
| Booking or application fee | A charge for reserving a product or processing an application. |
| Mortgage valuation fee | The lender’s assessment of whether the property provides acceptable security. |
| Broker fee | A fee charged by a mortgage broker for its service, where applicable. |
| Legal fee | The cost of legal work connected with the mortgage or purchase. |
| Electronic transfer fee | A possible charge for transferring mortgage funds to the conveyancer. |
| Mortgage account fee | A lender administration charge that may cover setting up, maintaining or closing the account. |
| Higher-lending charge | A possible lender charge associated with higher-LTV borrowing. |
| Early repayment charge | A charge that may apply when repaying more than permitted or leaving during a restricted period. |
| Exit or closure fee | An administration charge that may apply when the mortgage account is closed. |
Not every mortgage includes every fee. Fee names, amounts, refund conditions and payment dates vary between lenders and products.
What Happens If a Product Fee Is Added to the Mortgage?
Some lenders allow the product fee to be added to the mortgage instead of being paid upfront.
This increases the mortgage balance and means interest may be charged on the fee.
Illustrative Example
Product fee: £999
Mortgage term: 30 years
Assumed interest rate: 5%
If the £999 fee remained within the mortgage for the full term at that rate, it would add approximately £5.36 to the monthly repayment and could cost about £1,931 in total.
This example assumes the rate remains at 5% for 30 years. Real mortgages normally change rate during the term, and the fee may be repaid earlier.
Hidden cost: Adding a fee to the mortgage avoids an immediate payment, but the fee becomes part of the interest-bearing loan.
Low Mortgage Rate vs Product Fee
A lower advertised mortgage rate does not always produce the lowest short-term cost if it comes with a large product fee.
Simple Two-Year Illustration
| Mortgage A | Mortgage B | |
|---|---|---|
| Mortgage amount | £200,000 | £200,000 |
| Term | 25 years | 25 years |
| Initial rate | 4.40% | 4.65% |
| Product fee | £1,499 | £0 |
| Approximate monthly payment | £1,100 | £1,129 |
Mortgage A has a lower monthly payment, but it also carries a £1,499 fee. A complete comparison would need to include the fee, monthly payments, cashback, other charges and the outstanding balance at the end of the deal period.
This is why the headline interest rate alone does not show the full mortgage cost.
What Is an Early Repayment Charge?
An early repayment charge, or ERC, may apply if the borrower:
- repays the mortgage during a restricted deal period;
- remortgages to another lender;
- switches product early;
- sells the property and cannot transfer the mortgage; or
- makes an overpayment above the permitted allowance.
The charge is commonly calculated as a percentage of the mortgage balance. It may reduce as the mortgage approaches the end of its restricted period.
Example
Outstanding mortgage: £240,000
Early repayment charge: 3%
£240,000 × 3% = £7,200
The exact calculation, restricted period and exemptions are stated in the mortgage offer.
Mortgage Overpayments and Allowances
Some mortgage products allow borrowers to repay more than the scheduled monthly amount without an early repayment charge, up to a stated limit.
The allowance may be based on:
- a percentage of the original mortgage amount;
- a percentage of the current balance;
- a fixed annual amount;
- the lender’s mortgage year; or
- the calendar year.
Unused allowances may not carry forward. The calculation and timing depend on the individual mortgage terms.
What Does Porting a Mortgage Mean?
A mortgage described as portable may allow the borrower to apply to transfer the existing product to another property when moving home.
Porting does not mean the mortgage automatically follows the borrower. The lender may carry out new:
- affordability checks;
- credit checks;
- property-valuation checks;
- loan-to-value calculations; and
- eligibility checks.
If additional borrowing is required, the extra amount may be placed on a different rate with separate product conditions.
An early repayment charge may still arise if the porting conditions or completion timescales are not satisfied.
What Happens When a Fixed Mortgage Rate Ends?
When an initial fixed or discounted deal ends, the mortgage normally moves to the follow-on rate identified in the mortgage offer unless another product is arranged.
A change in rate can change the monthly repayment.
Example
Outstanding mortgage: £220,000
Remaining term: 25 years
| Interest Rate | Approximate Monthly Payment |
|---|---|
| 4% | £1,161 |
| 5% | £1,286 |
| 6% | £1,417 |
The payment difference between 4% and 6% in this example is approximately £256 per month.
Can a Mortgage Rate Change Before Completion?
Mortgage rates can change while a buyer is searching for a property or preparing an application.
The point at which a rate is reserved varies between lenders. It may depend on:
- submission of a full application;
- payment of a booking or product fee;
- completion of required information;
- the mortgage offer being issued;
- the offer remaining valid; and
- completion taking place before the deadline.
If the purchase is delayed beyond the mortgage-offer expiry date, an extension, updated assessment or different product may be required.
Repayment and Interest-Only Mortgages
| Mortgage Type | What the Monthly Payment Covers |
|---|---|
| Repayment mortgage | Interest and part of the original mortgage balance. |
| Interest-only mortgage | Normally only the interest. The original mortgage capital remains to be repaid through an accepted repayment strategy. |
| Part repayment and part interest-only | Part of the mortgage balance is gradually repaid while another part remains outstanding. |
An interest-only mortgage may show a lower monthly payment, but the original capital does not reduce through those interest payments. The lender normally requires an acceptable way of repaying that capital.
Mortgage Cost Information Checklist
☐ Initial interest rate
☐ Fixed, tracker or variable rate type
☐ Initial deal period
☐ Follow-on rate
☐ APRC
☐ Product or arrangement fee
☐ Booking or application fee
☐ Mortgage valuation fee
☐ Broker and legal fees
☐ Cashback or fee contribution
☐ Early repayment charge
☐ Overpayment allowance
☐ Mortgage-offer expiry date
☐ Total amount payable
☐ Whether fees are refundable
☐ Whether fees are paid upfront or added to the mortgage
Frequently Asked Questions
Is the mortgage with the lowest rate always the cheapest?
No. Product fees, cashback, valuation costs, legal costs, early repayment charges and the outstanding balance can affect the overall cost.
Is APRC the same as the initial mortgage rate?
No. The initial rate applies during a particular deal period. APRC estimates the annual cost across the full mortgage term and includes certain charges.
Will a fixed mortgage payment remain fixed for the full term?
Only if the interest rate is fixed for the full mortgage term. Most fixed-rate products fix the rate for a shorter introductory period.
Does a tracker mortgage exactly equal the Bank of England base rate?
Not usually. It commonly tracks the base rate plus a lender margin, such as the base rate plus 1%.
Are mortgage product fees refundable?
Refund conditions vary. Some fees may be refundable if the mortgage does not proceed, while others may be non-refundable after a particular stage.
Does adding the product fee to the mortgage avoid the fee?
No. The fee is added to the loan balance and interest may be charged on it.
Can I leave a fixed mortgage early?
The mortgage terms may allow it, but an early repayment charge or another fee could apply.
Final Takeaway
The advertised mortgage rate is only one part of the cost. APRC, product fees, follow-on rates, early repayment charges and the length of the deal can materially change what a buyer pays.
Key point: The mortgage illustration contains more useful cost information than the headline rate alone.
Official Sources
- MoneyHelper: Mortgage Interest Rates Explained
- MoneyHelper: Mortgage Fees and Buying Costs
- Financial Conduct Authority: Mortgage ESIS Requirements
- Financial Conduct Authority: Content of Mortgage Information Sheets
- GOV.UK: Mortgage Fees and Home-Buying Costs