The True Cost of a Loan: APR vs. Interest Rate in Mortgages in Canada

When considering a mortgage in Canada, it’s essential to understand both the interest rate and the APR (Annual Percentage Rate). While they both relate to the cost of borrowing, they offer different insights into the true cost of your loan.

What’s the Difference?

• Interest Rate: This is the percentage the lender charges you to borrow money. It’s applied to the principal loan amount and directly affects your monthly payments. However, it only accounts for the interest, not any additional fees.

• APR: This includes the interest rate plus additional fees such as administrative costs, insurance, and appraisal fees. APR gives a more comprehensive view of the total cost of the loan over a year, reflecting both interest and other costs.

Why APR Matters

The APR provides a clearer picture of the total cost of borrowing compared to just the interest rate. Even if one mortgage has a lower interest rate, higher fees could make its APR higher.

For example, if you’re comparing two mortgages with different interest rates but one has higher fees, the one with the lower interest rate could actually end up costing you more when considering the APR.

Make an Informed Decision

When shopping for a mortgage in Canada, always consider both the interest rate and the APR. While the interest rate affects your monthly payments, the APR gives you a better sense of the overall cost of your mortgage. Understanding both terms helps you make a more informed decision and potentially save money in the long run.