A new way of calculating and presenting the real cost of a mortgage has been developed by actuary Bacon & Woodrow, following industry demands that the annual percentage rate (APR) be scrapped.
Frank Chacko, senior consultant at Bacon & Woodrow, said: ‘In the context of regulated mortgage advice, it is difficult to see how the APR can be the main indicator of a product’s competitiveness. The average cost of a mortgage to the point of early redemption can be very different from that to maturity, making the current way in which APRs are quoted seriously misleading. Mortgage products are just too complex for all the vital information regarding costs to be encapsulated into a single figure.’
The new model is based on ‘mortgage repayment measures’ (MRM) which enable advisers to demonstrate the real cost of a mortgage over shorter time spans, rather than basing it over a 25-year term. For someone to have the same mortgage for that amount of time is now a rarity.
Ray Boulger, senior technical manager at Charcol, said: ‘APR is calculated over 25 years whereas the average mortgage is now four or five years.’
MRM is shown in a table or graph and shows the cost of the mortgage over different time periods, which would be shorter than 25 years. This then allows all payments, incentives and charges to be included in the figures.
Boulger favours the new measures: ‘We need these true comparisons which are displayed in a way which consumers and advisers can understand. To avoid misleading clients, it is advisable to have two figures: one APR calculation and another more realistic one like the one from Bacon & Woodrow.’
Chacko added: ‘Presenting a series of MRMs in tabular or graphical form would provide a useful information tool to help borrowers and advisers understand the full picture and make a more informed decision. It will also enable lenders to design fairer and clearer mortgage products.’