A proposed change in interest rate measures in the UK could make it far easier for consumers to compare the cost of mortgages, with the new interest rate measure offering increased transparency on the cost of borrowing. The Council of Mortgage Lenders claims that the new interest rate measure, which is known as the DAR or the Dynamic Annual Rate, will make the cost of borrowing far clearer to consumers, thus making it simpler for borrowers to compare loans in order to find the most competitive deal.
Currently, lenders in the UK use the Annual Percentage Rate measure, also known as the APR, in order to calculate the cost of borrowing. When using the APR to calculate the cost of borrowing the lender calculates on the basis that the loan will be kept on over the full term, ie 25 years. However, with many people switching mortgages before the end of the 25years, the APR does not offer a true comparison. Also, when using the APR measure no fees, charges, or arrangement fees are taken into account – the APR is based solely on the actual amount borrowed.
The DAR interest rate measure will differ in that it will take into account fees, charges, and arrangement fees. It will also be calculated over the length of time that the loan is likely to be kept. This is because many borrowers that take on Home loans and mortgages decide to pay off the loan in full after a few years – usually when a special offer such as a fixed rate runs out – and remortgage to a better value package.
Experts state that the DAR calculation will make it easier for borrowers to calculate the accurate cost of a loan, and will enable them to benefit from far easier and more accurate comparisons on similar loan deals. This will enable them to determine if and when they can benefit from switching from one product to another, and will also allow them to see how interest rate changes will affect the various costs associated with Home loans and mortgages.
An official from the Council of Mortgage Lenders said that this new measure makes information for consumers more ‘comprehensive’ and ‘meaningful’, and that it could prove very useful for consumers that are not sure with regards to how long they will be keeping the home loan or mortgage on before paying it off.