Hamptons International Mortgages has called for the Annual Percentage Rate on mortgage products to be scrapped.
The call comes as the UKs largest lender the Halifax has joined Nationwide, Woolwich and Northern Rock in offering existing clients new rates.
The APR is used to give an indication of the cost of a loan over the entire term of the mortgage. For example, with a two-year fixed rate at 5% with a 499 fee which then switches to standard variable rate (SVR) – currently at 6.75%, the APR would work out at around the 6.80% mark over a 25 year term.
However, Hamptons argues that, as consumers become wise to the concept of remortgaging in order to get more attractive rates, the APR becomes redundant for a number of reasons.
Firstly, the movement of standard variable rates in the future over two decades is impossible to predict, meaning that the calculation of APR is flawed.
Secondly, as remortgaging increases, the length of time a customer spends on the SVR decreases dramatically, again rendering the APR calculation inaccurate. In addition, there is general lack of understanding amongst borrowers about what the APR actually is.
The launch of highly publicised customer retention schemes by lenders such as Halifax also help build the case against APRs, according to Hamptons. In a bid to retain customers after an introductory rate period, lenders are starting to offer much more attractive rates as an incentive for clients to stay.
At the same time, brokers are being compensated for the role they play when helping customers to stay with an existing lender and avoid churn. Such moves may lead to a drop in remortgaging between lenders and strike yet another nail in the coffin of APRs.
Jonathan Cornell, technical director for Hamptons, says: The APR is the great white elephant of the mortgage market. It is a pointless indicator, based on the highly unrealistic scenario of a client finishing their rate and being too stupid or too lazy to switch products for a better rate, even with their existing lender, and spending the remaining 23 years or so on a standard variable rate which remains the same.
Even lenders, who have traditionally relied on customer complacency to boost their bottom lines, will soon wake up to the fact that they need to start offering existing customers reasons to stay as well as attracting new ones.
“The new customer retention schemes from the Halifax is a welcome development for the industry, for lenders who will maintain clients, customers who will benefit from more competitive rates and brokers who now no longer need to continually churn to earn.
Im baffled as to why APRs have lasted as long as they have, as I cannot think of anyone within the industry who feels they are a good measure of value. It is a shame that such a flawed measure of value is forced to be given such prominence on advertisements and keyfacts illustrations. I dont think many customers actually understand them either. In the interests of Treating Customers Fairly we should be removing meaningless jargon and worthless measurements such as the APR entirely.”