A new way of comparing loan costs?

Research published by the CML (Council of Mortgage Lenders) looks at new methods of presenting information about the cost of loans in a way that is helpful to consumers.

One such method is the so-called Dynamic Annual Rate (DAR) - a proposed new interest rate measure which contrasts with the current Annual Percentage Rate (APR) model, the standard measure for comparing the cost of loans, which must be disclosed to borrowers.

The DAR differs from the APR in two key respects: it is calculated for any period of time for which the loan may be kept; and it takes into account all payments and charges over the period for which the mortgage is held.

The APR is calculated on the assumption that loans will be held until maturity. Currently however, the majority of mortgages are repaid in a few years, meaning that APR information may not present the real costs of a loan.

Written by Frank Chacko, Grant Thornton Consulting Actuary, the research suggests that the DAR may be a useful tool to help borrowers understand how future changes in interest rates would affect the costs associated with different mortgage products (and when remortgaging would be worthwhile).

The FSA's statutory regulation, supported by the CML and lenders, seeks to provide mortgage information in a clear, simple manner that allows consumers to make informed choices. But this research questions whether more needs to be done to meet those requirements given the huge range of products facing consumers.

Michael Coogan, CML Director General, adds that the Dynamic Annual Rate provides a useful basis for discussion on the ways mortgage lenders can make consumer information as comprehensive, accessible and meaningful as possible.

"As the research points out, it is not fair to describe the APR as the 'wrong' way of calculating the cost of loans. In fact, it is a statutory requirement for lenders to use it.

"The DAR itself does not provide all the answers, but it is a useful measure for consumers who are uncertain about how long they will hold their mortgages, and the intermediaries who advise them."

21 September 2007 © Moneyextra.com

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