One of the most bewildering and confusing items on any mortgage illustration from my point of view must be the Annual Percentage Rate or APR listed on a product. APR was developed to give a comparative measure between various loans to show the overall cost of the borrowing on an annual basis taking into account a much broader range of fees and charges than the loan interest on its own.
Now that’s a good thing where the calculation makes sense, but on mortgage products in its current guise it makes no sense at all.
A simple look at the best buy tables on our website will show you that a product far cheaper during its initial interest rate term may have a much higher APR than a product with a considerably higher rate of interest. The issue is that APR is calculated over the lifetime of the loan and so will also consider the reversion rate of the product after its initial term.
There are several reasons why this is misleading;
- 1. Reversion rates are generally variable and not linked directly to bank base rate. In two years time a lender with a previously un-competitive reversion rate may well be leading the market and vice versa – hence it is not a factor that should play a major part in the decision making process.
- 2. You would generally regularly remortgage during the early years of your mortgage repayment to ensure a competitive rate of interest so including the reversion rate after the initial mortgage term distorts the picture.
- 3. Clever design can skew the figure. Lifetime trackers appear very competitive because they have no reversion rate, and refunding upfront fee’s affects the calculation but could cost a pretty penny if the loan never goes ahead.
APR is a system that was never really designed for mortgage contracts but has become a legal obligation when advertising them due to the confused dual regulatory system between the FSA and the Office of Fair Trading, it makes some sense on unsecured loans and very little in the mortgage market.
It is high time this dual regulation was removed and APR calculations either scrapped on mortgage contracts or replaced with something far more specific to the complex nature a mortgage product.