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DAR useful tool for mortgage comparison

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by Gill Montia

The introduction of a new type of interest rate, known as the dynamic annual rate (DAR), could help consumers compare the cost of home loans.

According to the Council of Mortgage Lenders (CML), DAR could bring greater transparency to the costs of servicing a mortgage.

The new rate measure would be calculated over the likely life of the loan and would take into account associated fees and charges.

Currently, lenders are required to quote rates in terms of annual percentage rate (APR).

APR is calculated on the assumption that the mortgage will be held until maturity and does not take into account any fees associated with the loan.

In reality, the majority of homeowners remortgage after a relatively short period because they repay a mortgage in full at the end of an offer period, which is commonly between two and five year.

DAR would take this into account and show the true cost of a mortgage, allowing products to be compared on a like-for-like basis.

It could also indicate how future changes in interest rates would affect the costs associated with different mortgage products.

The introduction of DAR is currently undergoing further research, but it has been described by the CML as potentially “a useful measure for consumers who are uncertain about how long they will hold their mortgages, and the intermediaries who advise them.”

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News posted: September 25, 2007

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