Annual percentage rates – the FSA's preferred means of mortgage price comparison – have been slammed as a “useless” measure of mortgage costs.
If CP146 proposals are agreed, APR will be a central element of financial promotions produced by intermediaries and lenders.
But critics say APR cripples product transparency. Frank Chacko, associate at Hewitt Bacon & Woodrow, says: “Borrowers are given the relative costs of a 25-year mortgage as an APR, when in fact they need to compare prices in a shorter time frame since people remortgage far more frequently.”
Redemption penalties and discount timing can both make mortgages shape up very differently when compared over a shorter term.
“The relative costs over the four-year time frame of an average mortgage are unrelated to what customers are shown for a 25-year loan.”
In CP146, the FSA admits there are “shortcomings” to the APR. It says: “The formula has not kept pace with developments such as cashback and current account mortgages.” But it proposes to make advertisers highlight product pros and cons to go some way to ensure APR is not misleading.