What Is The Difference Between Interest Rate & APR?

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Why Does A Mortgage Have Two Different Interest Rates?

Dear Ross, we recently bought our first home, and we had to sign lots of papers with our mortgage agent. One of them was called a borrower disclosure. Our mortgage is for five years at 3.04% but the annual percentage rate (APR) is higher than that.

What is this APR,and why does our mortgage have two different interest rates?

-S.S. Vaughan, Ontario.

The interest rate is the actual interest rate of your mortgage – in this case 3.04%.

The APR is a modified calculation that reflects any additional fees and costs incurred with getting your mortgage.

If you put down less than 20%, you will have mortgage insurance premium included in your mortgage, and also PST payable to your lawyer on the closing date.

APR

If you had to pay for an appraisal, this could also be an additional fee. Same for a lender fee (unlikely given you seem to be an “A” client), and also even a brokerage fee, also unlikely in your case.

Some people even include your legal fees and disbursements in this calculation, though that is not a common practice.

They add these amounts to the mortgage amount, factor it over time, and come up with an adjusted annual interest rate which more accurately reflects your total cost of borrowing.

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​Ross Taylor
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents

Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column ​ in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.

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