Why does the APR no longer serve to compare variable mortgages?

The equivalent annual rate (APR) is an indicator that was created to facilitate the comparison of several financing offers, as it represents what a loan can cost each year taking into account all those items that may make it more expensive (interest, commissions of formalization , etc.). However, from the financial comparator MakeMyCash they warn that there are some products that can no longer be compared to this measure: mortgages at a variable rate.


Formula change

mortgage loan

To understand it, we must first explain how variable mortgages are currently marketed in Spain. These products, in the vast majority of cases, have a fixed interest that is applied during the first 12 or 24 months (called initial rate) and a subsequent variable interest, consisting of a differential plus a reference index (the Euribor, normally), which is applied later.

When a mortgage has an initial interest and a subsequent variable rate, the Regulatory Law of Real Estate Credit Contracts, effective as of June 16, 2019, establishes that its equivalent annual rate must be calculated under the assumption that its initial interest is applied throughout the life of the mortgage. This is indicated in Annex II, which shows the parameters that should be used to determine the APR of the mortgages.

Imagine, for example, that a mortgage variable has an interest of 2% the first year and Euribor plus 1% the following. With this new formula, the APR of this loan should be calculated under the hypothesis that the 2% interest is applied over the entire term of the mortgage. Therefore, unlike what happened before the change in regulation, the equivalent annual rate does not reflect how much the mortgage would cost if the interest of Euribor plus 1% was applied after the first 12 months.


An inflated APR

home loan

Because of the application of this new formula, the APR of most of the variable mortgages sold in Spain has risen sharply. But that has not been the only consequence, because now that interest is no longer taken into account as of the second year, this measure is no longer useful to know if a variable rate mortgage loan is cheaper than another.

In fact, according to the MakeMyCash comparator, there are even cases in which the APR of a variable mortgage is higher than that of a fixed mortgage. A good example is Dominant Coin: its Variable Mortgage, at 1.89% first year and at Euribor plus 1.10% later, has an annual rate equivalent to 25 years higher (2.14%) than that of its Mortgage Fixed (1.99%), whose interest for that term is 1.74%.


You have to look at the differential

mortgage loan

Thus, since the equivalent annual rate is no longer a valid indicator to compare mortgages to a variable rate, from MakeMyCash they advise to look at other aspects when advising these products. One of them is the differential, that is, the percentage that is added to the Euribor to determine the variable interest of the credit. The lower, the cheaper the fees paid after the end of the initial period.

It is also important to keep in mind all the other factors that can make financing more expensive: the products combined or linked to the loan, the opening fees, the possible appraisal expenses … According to this comparator, only by analyzing all the fine print can you know if a mortgage variable is cheaper than another.

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