Annual Percentage Rate of Charge (APRC) calculations

When offering customers a mortgage, lenders are required to disclose the associated costs of the contract. One measure used for this is the Annual Percentage Rate of Charge (APRC).

The APRC shows, as a percentage, the annual cost of a mortgage over its lifetime. It incorporates all relevant charges (including fees) that relate to the mortgage borrowing.    

Systems issues have led some firms to incorrectly calculate the APRC at the time when interest rate expectations rose sharply amid market volatility in Autumn 2022. Problems have arisen where calculating an APRC for a mortgage where the reversion rate is lower than the initial introductory rate period.

Where this is the case the APRC should be calculated on the basis that the initial rate will continue to the end of the mortgage term, rather than reverting to the lower reversion rate after the initial fixed period. This is set out at MCOB 10A.3.1R(5).  

We understand firms and their service providers are working to ensure these calculations are corrected as soon as possible. It is important that all firms who are not currently complying take prompt action to address this. 

Our data shows that up to 88% of mortgages with an initial fixed rate period were priced with an introductory rate higher than the reversion rate between early October and late November 2022. Today, less than 5% of mortgage products on sale are priced in this way. A significant proportion of these mortgages will have included an incorrect APRC figure in its associated disclosure.

Before and at the point of sale, borrowers receive a range of other disclosure on the price and monthly cost of their mortgage. This includes the initial rate, their lender’s current reversion rate and the monthly contractual payments. This other disclosure was unaffected by the error leading to incorrect APRC calculations. Our research shows that when choosing their mortgage, borrowers’ primary point of reference is the initial monthly repayment.

While we consider that, in general, an APRC calculated on incorrect assumptions is unlikely by itself to deprive borrowers of the ability to make informed choices, consistency in the way the APRC is calculated does help those who use the APRC to compare the cost of different products.

It is therefore important that any non-compliance is rectified. Borrowers who feel they have made their decision based on an incorrect APRC should speak to their lender.

We will allow firms time to bring their systems into compliance and we expect firms to do this as soon as practicable. During this time, our rules remain applicable. We may ask firms to confirm their compliance in writing.

Firms may need to consider the market disclosure implications of non-compliant systems. We will continue to monitor the market, including any changes in product pricing that further expose this calculation issue. 

Firms should address any questions to their usual Supervision contact.