How to Compare Two Mortgage Deals Properly (APR vs True Cost)

When comparing mortgage deals in the UK, lenders are required to disclose standardised cost figures alongside their interest rates. The two figures most commonly encountered are APR (Annual Percentage Rate) and APRC (Annual Percentage Rate of Charge). Which figure applies, and in what context, depends on the type of mortgage contract involved. Understanding what these figures include, how they are calculated, and where their limitations lie is essential for making sense of mortgage illustrations and advertising materials, just as understanding other financial aspects like affordability assessments and credit scores is crucial for your application.

This article explains how APR and APRC work as systems, what the rules governing them require, and where confusion commonly arises. It does not provide financial advice or recommendations.

APR and APRC are standardised cost figures governed by FCA rules. APRC applies to MCD regulated mortgage contracts and is the required figure in ESIS documents and certain financial promotions for those products. APR under MCOB 10 applies to non-MCD regulated mortgage contracts and is disclosed in a KFI context. Both figures express the annual cost of borrowing as a percentage and are designed to allow comparison between products — but both carry important limitations, particularly for mortgages with an introductory deal period.

The Regulatory Framework

The calculation and disclosure of APR and APRC are governed by the FCA's Mortgages and Home Finance: Conduct of Business sourcebook, known as MCOB. The FCA derives its authority to set these rules from the Financial Services and Markets Act 2000 (FSMA).

Within MCOB, two separate sets of rules apply depending on the type of mortgage contract involved:

• MCOB 10 governs APR calculations for non-MCD regulated mortgage contracts, with disclosure required in a KFI context.
• MCOB 10A governs APRC calculations for MCD regulated mortgage contracts, with disclosure required in the ESIS and in certain financial promotions.

The classification of a mortgage as MCD or non-MCD is not simply a matter of the date it was taken out, though the MCD framework came into effect on 21 March 2016. Whether a given contract falls within the MCD regulated category depends on its nature and the applicable regulatory rules, not solely on timing. Most residential mortgages entered into from that date are MCD regulated contracts, but this is not universal.

The EU Mortgage Credit Directive (Directive 2014/17/EU), implemented in UK law on 21 March 2016, introduced the APRC as a standardised disclosure requirement. The calculation methodology is derived from Annex I of the MCD and incorporated into MCOB 10A.

What APRC Represents

APRC shows the total cost of an MCD regulated mortgage contract over its entire term, including interest rates, fees, and charges, expressed as an annual percentage. It incorporates all charges within the total cost of credit definition as set out in MCOB 10A.1.2R — though this does not extend to optional ancillary products or purely contingent costs. The calculation assumes that the mortgage remains valid for the agreed period and that all obligations are fulfilled as specified.

The mathematical formula used to calculate APRC is set out in MCOB 10A.2.2R. It works by equating the present value of drawdowns with the present value of repayments and charges. The calculation uses specific standardised assumptions: intervals are expressed in years or fractions of a year; a year is presumed to have 365 days (or 366 in a leap year); and an equal month is presumed to have 30.41666 days, derived from dividing 365 by 12.

What APR Represents

APR calculates the annual cost of borrowing including interest and certain fees for non-MCD mortgage contracts, using the prescribed formula set out in MCOB 10.3.1A R. This formula equates the present value of drawdowns with repayments and charges, incorporating the total charge for credit as defined in MCOB 10.4. APR is a standardised percentage produced using those prescribed assumptions; it is not a forecast of future costs, and because it relies on contractual terms and standardised inputs rather than borrower behaviour, it will not reflect outcomes such as remortgaging before the end of term. For a look at the other side of the remortgaging process, read our guide on why remortgage applications are declined.

Disclosure in Advertising

Financial promotions for MCD regulated mortgage contracts must include APRC at least as prominently as any interest rate, and must do so by means of a representative example. This requirement is set out in MCOB 3A.5.1R(1)(e) and MCOB 3A.5.1R(2).

The representative example must satisfy a specific test for representativeness: under MCOB 3A.5.1R(3), an example is only representative if the firm reasonably expects that at least 51% of consumers who enter into agreements as a result of the promotion would be charged the specified APRC or below. This is sometimes referred to as the "51% rule," but it is more precisely understood as the test that determines whether an example qualifies as representative at all.

Pre-Application Disclosure

Before a mortgage application is made, lenders are required to provide either a Key Facts Illustration (KFI) or a European Standardised Information Sheet (ESIS), depending on which type of mortgage is being offered. MCOB 5 governs KFIs for non-MCD mortgages; MCOB 5A governs ESIS documents for MCD mortgages. Both documents are required to include the relevant APR or APRC figure as appropriate.

The following rules are established in FCA primary sources and apply directly to how mortgage cost figures are calculated and disclosed.

The Representative Example Test (HIGH confidence): The representative APRC shown in mortgage advertising must satisfy the test under MCOB 3A.5.1R(3): the firm must reasonably expect that at least 51% of consumers who enter into agreements as a result of that promotion would receive the specified APRC or lower. A figure available only to a minority of applicants cannot serve as the representative example.

MCOB 10A.3.1R(5) — Fixed Rate Calculation Rule (HIGH confidence): Where the reversion rate (the rate a borrower moves onto after the initial deal period ends) is lower than the initial fixed rate, the APRC must be calculated assuming the initial rate continues for the whole term of the mortgage. This rule sits within MCOB 10A.3.1R(5). In June 2023, the FCA reminded the industry of this existing requirement and clarified its expectations following the market conditions of Autumn 2022, when approximately 88% of mortgages had introductory rates priced higher than their reversion rates — an unusual condition that made the implications of the rule particularly significant. By June 2023, the FCA noted this proportion had fallen to less than 5% of the mortgage market.

APRC2 for Variable Rate Mortgages (HIGH confidence): Where a mortgage allows for variations in the borrowing rate and does not fall within the fixed-rate exemption under MCOB 10A.1.5R (fixed rate for five or more years), the ESIS must include an additional illustrative figure. This figure — sometimes referred to as APRC2 — illustrates the cost under a scenario of significant interest rate increases. The method for calculating it is prescribed within MCOB and the ESIS annex instructions; in plain terms, this involves applying a reference rate based on a 20-year high interest rate, though the precise calculation methodology is set out in the regulatory framework rather than reducible to that summary alone.

Charges Excluded from Total Charge for Credit (HIGH confidence): Certain charges are excluded from the total charge for credit used in APR calculations under MCOB 10.4.4R. These exclusions include charges payable upon customer failure or default (MCOB 10.4.4R(1)(a)), charges for money transmission services, account keeping fees where the borrower has a reasonable freedom of choice, and insurance premiums that are not required as a condition of the credit. FCA guidance under MCOB 10.4.3G(3) also states that the value of any cashback or similar incentive linked to the contract should not be reflected in the total charge for credit or APR. These exclusions operate within the APR and total charge for credit framework under MCOB 10; the equivalent MCD framework for APRC uses the broader "total cost of credit" definition under MCOB 10A.

Mortgage Fees (MEDIUM confidence): Mortgage arrangement or product fees typically range from £0 to over £2,000, depending on the lender and product. In most cases, higher fees are associated with lower interest rates, though this varies by provider and product type.

APR vs APRC: Which Applies to Which Mortgage?

A common misunderstanding is that APRC applies to all mortgages while APR is reserved for unsecured lending. The regulatory position is more precise. APRC applies to MCD regulated mortgage contracts under MCOB 10A; APR under MCOB 10 applies to non-MCD mortgage contracts. The classification depends on the nature of the contract and the applicable regulatory rules, not solely on the type of lending being secured or unsecured. The simplified consumer shorthand — "APR for loans, APRC for mortgages" — does not fully capture this distinction.

What the APRC Figure Actually Assumes

The APRC is calculated using standardised assumptions, including that the borrower remains on the mortgage for the full agreed term. Where a mortgage has an initial deal period, the calculation incorporates the contractual terms that apply after that period ends, including any reversion rate. Because the formula uses prescribed inputs rather than modelling borrower behaviour, it does not reflect what would happen if a borrower remortgaged at the end of an initial deal — which published guidance from multiple UK financial institutions notes is a common outcome. This is a recognised limitation of the standardised calculation, inherent to the framework, rather than an error in any individual lender's figure.

What the APRC Does Not Include

In most cases, APRC does not account for early repayment charges, overpayments, or payment holidays. These are voluntary or conditional charges that fall outside the standardised cost calculation. Early repayment charges are a distinct category from default charges: they are a contractual charge arising from a borrower's right to redeem early, not a penalty for failure. MCOB 10.4.4R(1)(a) explicitly excludes charges payable upon customer failure from the total charge for credit, but early repayment charges are a separate type of cost. Whether they are included in APRC is not explicitly resolved in the primary FCA text reviewed; however, multiple UK lenders and consumer finance sources consistently note their exclusion from the figure.

The Representative APRC in Advertising

The APRC shown in a mortgage advertisement is a representative figure, not a personalised quote. For the example to be valid, the firm must reasonably expect that at least 51% of consumers entering into agreements as a result of that promotion would be charged the stated APRC or below. It does not indicate what any individual borrower would receive.

The Fixed Rate vs Reversion Rate Anomaly

Where the reversion rate on a mortgage is lower than the initial fixed rate, MCOB 10A.3.1R(5) requires that the APRC be calculated using the initial fixed rate for the entire term of the mortgage. During October to November 2022, following significant market volatility, approximately 88% of mortgages in the UK had introductory rates higher than their reversion rates. The FCA used its June 2023 reminder to draw attention to this existing rule and its application under those conditions. By June 2023, the FCA noted this had fallen to less than 5% of the mortgage market.

The effect of this rule is that, in those circumstances, the APRC does not reduce mid-calculation to reflect the lower reversion rate — it must be held at the higher initial fixed rate across the full term.

APRC2 for Variable Rate Mortgages

For variable rate mortgages outside the fixed-rate exemption under MCOB 10A.1.5R, lenders are required to include an additional APRC figure within the ESIS. This is calculated using a prescribed method based on a stressed interest rate scenario — in plain English, a rate reflecting a 20-year high — though the detailed calculation methodology is set out in MCOB and the relevant ESIS annex instructions rather than reducible to a single benchmark description. It is a regulatory stress scenario figure, not a forecast.

The APR and APRC figures shown on mortgage illustrations and in advertising are standardised outputs of regulated calculation formulas. They are produced to a consistent set of rules so that different products can be compared on a common basis. For more guidance on choosing a product that meets your needs, explore our full mortgages category.

Because the calculation is standardised, two mortgages with the same APRC may differ in their actual cost depending on how long the borrower remains on the product, whether fees are paid upfront or added to the loan, and what rate applies after any initial deal period ends.

Mortgage arrangement fees, where charged, in most cases range from £0 to over £2,000. Whether a fee is paid upfront or added to the loan balance affects how it interacts with the interest calculation over time, though this article does not draw conclusions about outcomes, as those depend on individual circumstances.

The ESIS or KFI that a lender is required to provide before an application is made will include the applicable APRC or APR figure for that specific product, calculated using the standardised methodology. This is distinct from the representative APRC shown in advertising, which must satisfy the 51% representativeness test under MCOB 3A.5.1R(3).

• APRC (Annual Percentage Rate of Charge) is the standardised cost figure required under MCOB 10A for MCD regulated mortgage contracts. APR under MCOB 10 applies to non-MCD regulated mortgage contracts. The classification of a mortgage as MCD or non-MCD depends on the nature of the contract and the applicable rules, not solely on the date it was entered into, though the MCD framework came into effect on 21 March 2016.
• Both figures are produced using prescribed formulas that equate the present value of drawdowns with the present value of repayments and charges. They are standardised outputs, not forecasts, and do not model borrower behaviour such as remortgaging before the end of term.
• For MCD mortgage financial promotions, APRC must appear at least as prominently as any interest rate and must be presented by way of a representative example. An example is only representative under MCOB 3A.5.1R(3) if the firm reasonably expects at least 51% of consumers entering into agreements as a result of that promotion would receive the stated APRC or below.
• Where a reversion rate is lower than an initial fixed rate, APRC must be calculated at the fixed rate for the full term under MCOB 10A.3.1R(5). For variable rate mortgages outside the fixed-rate exemption, an additional APRC figure calculated under a prescribed stressed rate scenario must be included in the ESIS.
• APRC does not account for optional or contingent costs. Early repayment charges are a distinct category from default charges; multiple UK lender sources consistently indicate they are not included in APRC, though the primary FCA text does not explicitly resolve this.
• The APRC assumes the borrower remains on the mortgage for its full term, including any period at the reversion rate after an initial deal ends. In most cases this differs from the experience of borrowers who remortgage at the end of an initial deal — a recognised limitation of the standardised calculation framework.