As the FSA attempts to clear the muddy mortgage waters, research from John Charcol has found that 29 per cent of consumers are baffled over which rate to look at when they arrange their mortgage*. Whilst rate should never be the sole condition on which you base a mortgage decision, it is fundamental and not knowing which one to look at is very worrying.
Equally as concerning is that fact that just one in ten borrowers based their decision on the headline rate. A staggering 33 per cent chose to use the misleading annual percentage rate (APR) as the best guide for what is a good value mortgage.
Ray Boulger, senior technical manager at John Charcol, commented: "These findings are very worrying as they suggest that a year after statutory mortgage regulation a huge number of borrowers, presumably mainly those who are not getting good advice, are in danger of mis-buying. If the 33 per cent of borrowers who base their decision primarily on the APR plan to keep their mortgage for its full term and consequently in most cases stay on an uncompetitive rate after their initial deal ends, using the APR would be sensible, but with the average life of a mortgage now down to under 4 years we know this won’t happen.
"Using a comparison tool that is normally calculated on a 25 year term, with typically between 80 per cent and 92 per cent of that term based on a Standard Variable Rate (SVR) which most borrowers will only pay for a short period, is guaranteed to mislead the majority of borrowers who will either remortgage shortly after their initial deal has ended or will take a new rate from their existing lender. Our research shows that many consumers could easily take a deal that is inappropriate for their circumstances. The APR does have merit when comparing mortgage deals that have a lifetime fixed or tracker rate, but for those who manage their mortgage effectively it is largely irrelevant."
John Charcol’s findings come in the wake of the FSA’s campaign to simplify the mortgage world. The FSA’s research** revealed that over half of all consumers don’t know what APR stands for.
Boulger continues, "It is of course an issue when consumers do not understand everything about a product they are buying and increases the risk of subsequent complaints. It is therefore clear that ongoing consumer education is a priority and some of the new FSA initiatives should help. However, this will only be true if that education focuses on the fact that the APR should not the paramount consideration for the vast majority of consumers as far as mortgages are concerned, unless the rules are changed so that the way APRs are calculated are relevant to the modern mortgage."
