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They say past performance is no guide to the future – the EU disagrees

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  • 07/03/2014
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They say past performance is no guide to the future – the EU disagrees
In the investment sector they say past performance is no guarantee of future results. A pretty logical disclaimer, you might think...

But that’s not the view of the EU rule makers who, as part of the EU mortgage credit directive, want lenders to display a second APR on their mortgage products, based on the highest rate a mortgage has been in the last two decades.

The final 52 page directive was released last week and this handy formula was published last Friday to help work out the APR:

mmr-calculations

 

 

 

 

 

Try explaining that one to a client on a wet Wednesday afternoon.

The additional APR will need to be displayed on all mortgage advertising and documentation where the mortgage is a variable rate or fixed for five years or less – or, the vast majority of all mortgages sold in the UK.

This APR must be based on the highest rate a mortgage could reach based on historical interest rates from the last 20 years.

Standard APRs are often criticised by those in the mortgage industry for making the assumption that a borrower will remain with a provider for the full mortgage term. The directive lists 20 separate assumptions that lenders will need to make when calculating this rate, so where is the certainty for the borrower?

The UK has two years to implement the changes and already the CML has called on regulators to make the process as quick and painless as possible, with another key change being the replacement of the KFI with a European Standardised Information Sheet (ESIS) by 21 March 2019.

The directive is rightfully needed in many parts of Europe where there is little to no mortgage regulation but with the UK already going through an upheaval in mortgage regulation with the MMR, it still seems rather excessive to go through the whole costly process all over again.

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