APR of a real estate loan: the elements that enter the calculation
Introduced by a European directive in 2008 and extended in 2014 to mortgage loan offers, the annual effective annual rate (APR) ex TEG responds first of all to a desire by the public authorities to protect the borrower.
While it is undoubtedly the best indicator to compare two offers of credit, its calculation is based on a complex formula and gives a result which is sometimes approximate, as demonstrated in this file.
Definition Items included in the overall effective annual rate What to do if your APR is wrong?
It expresses the total cost as an annual percentage. For this, it includes all the costs linked to the credit :
- The annual interest rate
- Borrower insurance contributions
- Application fees
- Guarantee costs
- Brokerage fees where applicable.
Optional fees are generally not included in the calculation of the APR
In the case of a revisable loan, the rate for the first period fixed in the mortgage contract (a month or quarter) is used. In this case, the overall annual effective rate in no way reflects reality, because the variability of the rate prevents knowing its cost in advance.
The comparison between 2 offers then becomes completely useless.
Important: in all cases, it is recommended to compare offers with the same duration.
The elements included in the calculation of the APR
The APRC includes a calculation method that takes into account all the compulsory costs linked to the loan. The technique consists first of all in calculating the overall cost of the loan in euros and then converting this cost into an annual rate. Note that two elements are already expressed in rates: interest and insurance premiums.
Items expressed as a percentage
Interest on the loan
This is the most important point of negotiation because it is on the nominal interest rate that essentially depends on the total cost of the credit and therefore the APR.
This is the rate excluding insurance indicated in the commercial proposal. It determines the share of interest included in your monthly payment and which you will also find in the amortization table.
The interest rate must remain within the limit of usury rates fixed each quarter by the Banque de France. This rule is still respected by lenders, but if the rates for home loans are obviously far below the usury thresholds, those for revolving loans are dangerously close.
After the interest rate, it is the element that has the most impact on the cost of credit, since it generally represents more than 20% of the total cost. Only compulsory contributions are included in the calculation.
We can note at this stage 4 “anomalies” which limit the effectiveness of the APR in its role of objective comparator.
- If you choose a quota greater than 100%, for example, 140% (70/70), the contribution is taken into account is usually calculated on the basis of 100% of the loan. The part which covers the additional 40% is not taken into account.
- Optional guarantees like job loss are not included.
- If you change the insurance contract during the life of the loan, the APR is affected and no longer reflects the real cost of the loan.
- In the case of consumer credit, optional insurance is not included.
Be careful when comparing insurance rates, as some apply to the principal owed (in the case of insurance delegations) and others to the borrowed capital (group banking contracts).
Important: in force since 2013, the TAEA (effective annual insurance rate) remains little used by players in the borrower insurance market. However, it is of practical interest to the borrower since it suffices to add the APR to the credit rate to find out the APR (excluding first-year expenses).
Fixed costs charged at departure
Mutual surety is generally preferred by lending organizations which prefer it to real sureties (mortgage or privilege lender of money) considered too restrictive. The borrower finds himself there moreover in term of tariff. The cost is integrated into the formula and converted into a rate.
Here again we can see the limits of the APRC since the latter cannot take into account:
- The reimbursement of part of the contribution, such as the part corresponding to the mutual guarantee fund returned by CREDIT LOGEMENT at the end of the contract.
- Release fees in the event of a mortgage or IPPD levied in the event of early repayment.
Loan application costs
The administration fees are at the discretion of the bank and have very little impact on the calculation of the APR. Intended to cover the expenses related to the constitution and the analysis of the file, they can easily be negotiated. Their amount is also converted into a rate by the mathematical formula of the APR.
In the same way as administrative or guarantee costs, the remuneration paid to intermediaries must be included in the calculation. The bank has an obligation to inquire about the amount invoiced by the broker to his client.
Namely: the MURCEF Law prohibits the broker from cashing in any remuneration before the loan is disbursed.
Surety information costs
The law obliges credit institutions to inform sureties each year by registered mail with acknowledgment of receipt. This formality is most often invoiced to the borrower. Although a legal vagueness remains, if it is proved that the loan would not have been granted without the assistance of the surety, the information costs must be integrated into the annual effective annual rate.
Note: current home loans are flexible. You will impact your APR if you suspend or if you change the amount of the monthly payment.