Jargon: Noun, language characterized by pretentious vocabulary or meaning/gibberish. (New Collins Concise English Dictionary).
APR: Noun, abbreviation of Annual Percentage Rate. Finance’s most flexible figure: it is horribly low on savings documents, but astronomically high on loan agreements. (The Devil’s Dictionary of Money, www.fool.co.uk)
The APR is the Lil Kim of financial services marketing, there she sits- out and proud – occupying the premium spot in all the glossy literature- as ostentatious as a rap star’s fur coats and bling. Ostensibly, the APR is there to help the consumer by giving a clear indication of the cost of a loan over the entire term of the mortgage. For example, a two year fixed rate with a lender at 5% with a £499 fee which switches to SVR (currently 6.75%) at the end of the fixed term would equate to an APR of 6.80% over a 25 year term. The prominence given to the APR on marketing literature is apparently justified by the fact that is supposedly easier for the consumer to compare and contrast competing products and as such it is something that the EU insists upon. It is my firm belief that this is a false supposition and rather than being helpful for the consumer it is in fact totally misleading and should be consigned to the rubbish bin along with the rest of our junk mail.
Firstly, you would be hard pressed to find more than a handful of borrowers amongst your average customer base who actually understand what the APR is, yet we are forced to display it prominently in our advertising and in Key Facts Illustrations. Devoting this much page space to something the customer neither understands nor, for the most part, could give two hoots about, cannot be seen as “Treating Customers Fairly”, but rather “Treating Customers Like Children”. Such meaningless jargon has no place in the mortgage industry.
Whilst it is true that for many years lenders have been heavily reliant on customer complacency to boost their bottom lines, slowly but surely the sleeping lions have started to wake up to the fact that which just one phone call they can speak to a broker who will help them remortgage and save themselves money. This renders the APR redundant as it relies on a customer either being too naive to switch to a better product or, even more incredibly, a savvy broker failing to spot the opportunity. As remortgaging is no longer viewed as a dirty word by the consumer the length of time a customer will spend on the SVR will decrease dramatically, thus shattering the APR calculations.
In addition, in its current form, the APR is a flawed smoke and mirrors exercise. Although it took a year for the Bank of England to bow to the inevitable inflationary concerns and increase the base rate from 4.5% to 4.75%, it is highly unrealistic to expect that it will now remain static for the next couple of decades- which is what the APR presumes.
Finally, lenders themselves are starting to wake up and smell the coffee and are now putting measures in place to retain existing customers. The big boys of the mortgage industry such as Halifax, Nationwide, Woolwich and Northern Rock are finally launching some highly publicised customer retention schemes. This involves offering borrowers much more attractive rates as an incentive to stay rather than sucker-punching them with the SVR or tutting as they walk out the door to a rival lender. Similarly, brokers are also being wooed with retention fees when they persuade a customer to stay with an existing lender rather than having to churn to earn. All in all, such moves are bound to lead to a drop in remortgaging between lenders and strike yet another nail into the coffin of APRs.
There is no doubt that customer retention schemes are the way forward and a welcome development for the mortgage industry. Lenders will keep clients for longer, customers will get more competitive rates without the hassle of moving to another product provider and brokers who now no longer need to get onto the “Churn to earn” treadmill.
The APR is the great white elephant of the mortgage industry and should be put out of its misery as soon as possible. Just as no amount of flashy diamond bling can disguise the fact that Puff Daddy hasn’t put out a decent album in years, you can’t disguise the fact that the APR is a pointless indicator and a flawed measure of value.
