When you want to take out a loan, whether it is a mortgage or a consumer loan, two concepts quickly come to light: the APR and the nominal rate.
You have probably just come out of your first meeting at the bank, and your advisor tells you a certain value for your rate, but speaks to you about APR. You are somewhat lost because you do not know which one will impact your borrowing.
We decrypt for you the difference between the two rates, their implications for your real estate project.
Understanding the APR: definition and calculations
Definition of the APR
The APR, or Annual Percentage Rate, is a mandatory indicator since 2016 for all credit institutions, whether it is a home loan or a consumer credit. It was established to provide borrowers with a more transparent view of the actual cost of their loan.
Indeed, when you discuss with your banker, he usually presents you with two values: the nominal interest rate and the APR. The nominal interest rate simply corresponds to the percentage of interest charged by the bank to lend you money. But it doesn't tell the whole story. In reality, many other fees are added to this rate, making it more difficult to compare between several banks. This is where the APR comes into play: it combines both the nominal interest rate and all the additional fees related to your credit.
Specifically, the APR includes:
The nominal interest rate (the price of the money you borrow),
The file fees charged by the bank,
The borrower’s insurance (often mandatory),
The guarantee fees (mortgage, security…),
And, if applicable, the brokerage fees if you go through an intermediary.
How is the APR calculated?
To simplify, the bank adds all these fees to your nominal rate and spreads them over the total duration of your credit. Imagine that you take out a home loan for 25 years. Without additional fees, your interest could amount to €30,000. But if we add €5,000 of various fees (insurance, file, guarantees…), the total cost of your credit rises to €35,000.
The bank will not ask you to pay these additional €5,000 all at once (except for certain parts like file fees). It will integrate them into the overall calculation of your APR and smooth this amount over the entire duration of the loan. Result: your “displayed” rate is higher than the simple nominal rate, as it takes into account these additional expenses.
A clear indicator… but sometimes misleading
Even though the APR is designed to protect the consumer and give them an overall view, it can remain somewhat opaque. Why? Because not all fees are paid in the same way.
The file fees are often settled immediately upon signing the deed.
The borrower’s insurance, on the other hand, is paid monthly, along with your installments.
The guarantees (mortgage, security) depend on the type of loan and can vary significantly from one bank to another.
Thus, the APR does not always reflect the reality of your cash outflows. It is primarily a tool for comparing multiple loan offers, not an exact snapshot of your monthly payments.
Concrete example to better understand
Let's imagine two banks:
Bank A offers a nominal rate of 3% with few additional fees.
Bank B announces a nominal rate slightly lower at 2.8%, but with high processing fees and expensive insurance.
If you only look at the nominal rate, Bank B's offer seems more interesting. But once all the additional fees are added, its APR can actually be higher than that of Bank A. Result: your mortgage with Bank B will cost you more over time.
In other words, the APR allows for an objective comparison of several loan offers, even if the displayed nominal rates seem attractive. Without the APR, it is very difficult to know the actual total cost.
Understanding the nominal rate: definition, functioning, and impact on your mortgage loan
The nominal rate is one of the terms you will consistently hear during a meeting at the bank to take out a home loan. It is often the first number that the banking advisor puts forward, as it allows showcasing an attractive rate to the client. But what exactly is the nominal rate? What is its purpose? And most importantly, how does it differ from the APR, which is the other key indicator of a home loan?
In this section, we will explain step by step the functioning of the nominal rate, why the bank presents it to you, and how it influences the total cost of your home loan.
What is the nominal rate?
The nominal rate is simply the percentage applied by the bank to calculate the interest on your loan. It is the price you pay to borrow money. In other words, the nominal rate corresponds to the remuneration of the bank on the amount it lends you.
Each monthly payment you make as part of your home loan consists of two parts:
A principal portion, which is a fraction of the amount you actually borrowed.
An interest portion, calculated based on the nominal rate, which constitutes the bank's remuneration.
How the bank earns from the nominal rate
It is essential to understand that the bank never lends for free. Its remuneration is based on the nominal rate, meaning the interest you pay in addition to the repayment of the principal.
But what often surprises borrowers is the way these repayments are structured. During the first years of your home loan, your monthly payments are largely made up of… interest. Why? Because the bank first seeks to secure its remuneration.
Example: If you borrow €200,000 over 20 years with a nominal rate of 3%, your first monthly payments will mostly go to paying interest (thus the bank's remuneration), and a smaller portion will go towards repaying the principal. It is only after several years that the proportion reverses: gradually, you will repay more and more of the principal and less and less interest.
This mechanic has an important consequence:
If you wish to sell your property or restructure your loan after just a few years, you will find that you still owe a large part of the initial principal.
The higher your nominal rate is, the greater the portion of interest in your monthly payments will be, and the more expensive your loan will be over its entire duration.
How is the nominal rate set?
Many borrowers think that the nominal rate is set arbitrarily. In reality, it depends on several specific criteria that the bank analyzes before granting you your home loan:
The bank's commercial policy: some banks deliberately offer lower rates to attract new clients, even if they make up for it with borrower insurance or ancillary fees.
Your borrower profile: income, job stability, level of debt, personal contribution… The stronger and more reassuring your profile, the lower the nominal rate will be.
Your level of risk: if you are considered a high-risk borrower (unstable income, past banking incidents, little contribution), the bank will apply a higher nominal rate to compensate for the risk of default.
Your relationship with the bank: being an existing client, having your income paid into the bank, or subscribing to other products (savings, home insurance, investments) can allow you to negotiate a better rate.
In practice, banking advisors rely on internal grids that define a minimum and maximum rate according to the borrower's profile. Your nominal rate is thus directly linked to your risk profile and the bank's strategy.
To Remember
The nominal rate is the cost of the money you borrow: it determines the portion of interest you will pay each month.
The bank mainly earns money from the interest of the nominal rate, which it prioritizes charging in the first years of the loan.
The higher the nominal rate, the more interest you will pay, and the higher the cost of your home loan will rise.
Difference between nominal rate and APR
It is important to clearly distinguish the nominal rate from the APR.
The nominal rate = only the interest calculated on the borrowed capital.
The APR = the nominal rate + all associated costs (application fees, borrower insurance, guarantees, brokerage fees…).
Comparative example:
Bank A offers a nominal rate of 3% with inexpensive insurance and few fees → final APR: 3.3%.
Bank B shows a lower nominal rate, at 2.8%, but with more expensive insurance and high application fees → final APR: 3.6%.
If you only look at the nominal rate, Bank B's offer seems more advantageous. But by looking at the APR, you realize that its real estate loan actually costs more.
That is why it is dangerous to rely solely on the nominal rate: it must always be analyzed alongside the APR, which gives a more comprehensive view of the total cost of credit.
Why does the nominal rate remain a key indicator despite everything?
Even though the APR is more complete and transparent, the nominal rate remains an essential indicator for assessing your credit. Why?
Because it determines the portion of interest that you will pay each month.
Because it directly conditions the overall cost of your loan over time.
Because it reflects your borrower profile and the trust that the bank places in you.
A low nominal rate is therefore always good news: it means that the bank considers you to be a solid profile and that it is willing to lower its margin to finance you.
APR vs nominal rate: which is more important for your mortgage loan?
Well, you now understand the difference between the nominal rate and the APR. But an essential question arises: in practice, which one is more important for your real estate project? Should you focus on the nominal rate or rather on the APR when comparing several loan offers?
This is a question that many borrowers have, especially during their first real estate purchase. To clarify, let’s go over the differences between these two rates together, then see what you can negotiate, what is really decisive for the total cost of your real estate loan, and how to use this information to make the right choices.
The nominal rate: the price of borrowed money
The nominal rate is the figure that the bank highlights first. Why? Because it is easy to understand and grabs attention. It represents the price of the money you borrow: this is the rate that determines the amount of interest you will pay each month, in addition to repaying your principal.
During the first few years of your loan, the bank mainly profits from these interests. That’s why your monthly payments are initially composed largely of interest, and only a small part of the principal. It is only over the years that this proportion reverses.
In short, the lower the nominal rate, the less interest you will pay over the duration of your loan. This is a fundamental element, as interest often represents several tens of thousands of euros on a real estate loan.
The APR: a comprehensive and transparent view
The APR (Annual Percentage Rate) is a more complete indicator. Unlike the nominal rate, it not only takes into account the interest but also all the fees related to your loan: application fees, borrower insurance, guarantees, brokerage fees.
This is why the law requires banks to communicate the APR: it allows the borrower to easily compare several offers without being lured solely by an attractive but misleading nominal rate.
👉 Concrete example: Bank A offers a nominal rate of 3% with few fees → APR = 3.2%. Bank B offers a nominal rate of 2.8% but with very expensive insurance and high fees → APR = 3.6%.
If you only look at the nominal rate, Bank B seems better. But the APR shows that the real cost of credit is higher with them.
Which one is more important for you?
The answer is simple: the APR is always more reliable for comparing two credit offers. Why? Because it gives you a comprehensive view of the cost of your real estate loan.
But be careful: this doesn’t mean the nominal rate is unimportant. On the contrary, it remains essential, as it determines the amount of interest you will pay month after month.
In summary: to compare two banks with each other, always look at the APR. To understand the cost of pure interest on your credit and anticipate your repayments, monitor the nominal rate.
What you can negotiate at the time of your loan
Good news: several elements can be negotiated with your bank when signing your real estate loan.
The nominal rate: this is the first thing borrowers seek to negotiate. Even a decrease of 0.1% can represent several thousand euros in savings over the loan duration.
Borrower insurance: often imposed by the bank, but you can choose one from an external insurer thanks to the Lagarde law and insurance delegation. Changing insurance can significantly lower your APR.
Application fees: these are sometimes fixed, sometimes proportional to the amount borrowed. Many banks agree to reduce or waive them for a good borrower profile.
Guarantees (mortgage, guarantee…): these vary between banks and can have an impact on the overall cost.
By negotiating wisely, you can thus lower both your nominal rate and your APR.
What you can renegotiate during the loan
Another often unknown point: it is possible to renegotiate certain elements during the life of your real estate credit.
Renegotiate the nominal rate: if interest rates fall, you can ask your bank to review your rate, or get your loan refinanced by another bank. However, be careful: as explained earlier, at the beginning of the loan, you pay mostly interest. If you wait too long, the benefit of renegotiation diminishes.
Change borrower insurance: since the Bourquin law and the Lemoine law, you can cancel your borrower insurance at any time and choose another, often much cheaper. This is one of the most effective levers to reduce your APR.
Restructure the duration of your loan: extending the duration reduces your monthly payments but increases the total interest paid. Shortening the duration does the opposite: higher monthly payments but significant savings on interest.
What should you prioritize?
It all depends on your goal. If you want to pay the least amount of interest possible, focus your efforts on negotiating the nominal rate. This is what directly determines the weight of interest in your monthly payments. If you want to effectively compare two banks, rely on the APR. This is the official, standardized, and transparent indicator. If you want to optimize your costs over time, especially watch the borrower’s insurance, as it can represent up to 30% of the total cost of the loan.
In practice, the good reflex is to look at both: the nominal rate to understand the “base” cost of your loan, and the APR to get a comprehensive view and know which bank is the most advantageous.
Understanding the APR with a concrete example
To fully grasp the role of the APR (Annual Percentage Rate) in a home loan, nothing beats a numerical example.
The context
Let's imagine you want to finance the purchase of a rental apartment with a mortgage. Your bank offers you the following conditions:
Amount borrowed : €200,000
Duration : 20 years (240 months)
Nominal interest rate : 1.60 %
Processing fees : €1,000
Borrower's insurance : 0.30 % of the borrowed capital per year
Guarantee fees (mortgage or guarantor) : €2,000
Now let's see the impact of these elements on the actual cost of the loan.
Step 1: Calculating the monthly payments (excluding insurance)
With a nominal rate of 1.60 % over 20 years, the monthly payment excluding insurance is approximately €965 / month.
This calculation is done according to the standard formula for a constant annuity. Online calculators make it very easy to verify these figures.
Step 2: Cost of borrower's insurance
The insurance corresponds to 0.30 % of the borrowed capital per year, which amounts to:
0.30 % of €200,000 = €600 / year, or €50 / month
Over 20 years: €50 × 240 months = €12,000
Step 3: Total cost of credit
Let's gather the various associated costs:
Loan interest = €974.32 × 240 months – €200,000 = €33,835.93
Borrower's insurance = €12,000
Processing fees = €1,000
Guarantee fees = €2,000
Total cost of credit = €31,600 + €12,000 + €1,000 + €2,000 = €48,835.93
The APR in practice
In our example, the APR comes out to approximately 2.32%, compared to a nominal rate of 1.60 %. This is the rate that should be used to objectively compare several offers.
Comparison between two loan offers
Detail | Offer A | Offer B |
|---|---|---|
Nominal rate | 1.60% | 1.40% |
Processing fees | €1000 | €3000 |
Borrower's insurance | 0.30% | 0.40% |
APR | 2.30% | 2.45% |
Even if the Offer B proposes a lower interest rate, its APR is higher due to additional fees. Hence the importance of looking at the APR and not just the nominal rate.
Conclusion: how to effectively use the APR and the nominal rate for your mortgage?
You understand it, the nominal rate and the APR are two different but complementary indicators to analyze a home loan. The former directly determines the amount of interest you will pay each month and represents the bank's compensation. The latter provides a comprehensive and transparent view of the true cost of your credit, including all additional fees.
The right reflex is therefore simple: always compare the offers using the APR, but keep a close eye on the nominal rate, as it determines your interest and repayments over time. Don’t forget that some elements can be negotiated or renegotiated over time, such as borrower insurance or the nominal rate, to optimize your monthly payments and reduce the overall cost of your loan.
By combining these two approaches, you will be able to make the right choices, effectively compare several banks, and especially save several thousands of euros on your real estate project.
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