From: Ronald Raygun 
Subject: Re: Interest Rates and APR - please explain!
Newsgroups: uk.finance
Date: Fri, 09 Apr 2004 10:50:44 GMT

Adrian wrote:

> I am trying to compare mortgages and am getting confused by the difference
> between the interest rates and APRs quoted.
> 
> I believe the APR is a better reflection of the actual 'interest', but I
> am confused as to why sometimes there is very little difference between
> the quoted interest rate and APR, and at other times there is a very large
> difference.
> 
> My current mortgage is with Intelligent Finance and the interest rate
> quoted is 5.2% and APR 5.3%.

OK, 5.2% quoted per year, almost certainly means 0.4333% per month,
which when compounded corresponds to an effective 5.3257% per year,
which is rounded to 5.3% for the APR figure.  In the absence of, er,
"complications", the APR is equal to the effective rate, rounded.

> Yet looking at the Charcol web site (discount
> rate mortgages) I see some big differences e.g 3.04% interest & 5.5%APR,
> 4.19% interest & 6% APR.

The answer lies in what you've said, these are discount rates, but
the APR is an averaged measure of the cost of the loan over its entire
lifetime.  Typically they will assume the discount rate applies for
maybe 2 years, and then the standard rate, which takes over after the
discount period, is assumed to apply for the remaining 23 years of
what is still regarded as the typical term of 25 years.  The effect
of the standard rate will outweigh that of the short-term discount rate.