Fri, 21 Sep 07
New research by the Council of Mortgage Lenders is proposing the Dynamic Annual Rate (DAR) as a new interest rate measure to allow borrowers to compare mortgage products more easily...
Research published by the CML looks at new methods of presenting information about the cost of loans in a way that is helpful to consumers. The Dynamic Annual Rate (DAR) is 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.
A useful tool to assess the impact of future interest rate changes
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 to better assess 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. 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, commented: "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.
Coogan continued: "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."
An increasingly complicated marketplace
With the increasingly complicated nature of financial products today, many consumers do not understand all the cost implications of the financial products they purchase - an issue which is being addressed by the Financial Services Authority (FSA) with the introduction of their six principles based around Treating Customers Fairly (TCF).
Paul Cook partner, within Grant Thornton's Financial Services Group commented:
"Recently the FSA has expressed its concern at the increasing complexity of the mortgage market. Using a measure such as the DAR makes it far easier for consumers to understand exactly what they are comparing. In addition, it ensures loan providers and advisers meet their obligations under TCF.
Cook added: "As many consumers now re-mortgage their houses between two and five years after taking their loan on, the DAR allows them to realistically compare the cost of mortgages across different lenders and products, including all charges and any early repayment penalties that may apply."
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