Understanding APR (Annual Percentage Rate)

The Annual Percentage Rate (APR) is a term you might come across when dealing with loans and mortgages. Here’s what it means:

  • The Annual Percentage Rate (APR) represents the total yearly cost of the loan, including any fees, expressed as a percentage.
  • The APR provides a more comprehensive view of the cost of borrowing as it includes any legal fees, appraisal fees, or origination fees in addition to your interest.
  • However, certain charges, such as mortgage prepayment penalties and CMHC mortgage insurance premiums, are not included in the APR.
  • Some lenders may offer a low interest rate but have high fees. The APR allows borrowers to understand the true cost of the loan.
  • In Canada, lenders are obligated to disclose the APR for credit products to potential borrowers. If there are no fees, the APR and interest rate will be the same.

APR vs Interest Rate

Understanding the difference between the APR and the interest rate can be crucial when dealing with loans and mortgages:

  • The interest rate is the cost that a lender charges you for borrowing money from them. It is expressed as a percentage of the loan amount on an annual basis. Interest is typically charged on a monthly basis.
  • For instance, when you make your monthly mortgage payment, a part of it goes towards your mortgage principal and a part towards the mortgage interest. The portion that goes towards the mortgage interest is determined by your mortgage rate.