New DAR interest rate measure proposed

The Council of Mortgage Lenders has revealed the proposal of a new interest rate measure that could be used to calculate the cost of borrowing as an alternative to the current APR system.

According to officials from the Council of Mortgage Lenders the new measure could mean increased clarity and transparency for consumers when it comes to working out the true cost of home loans and mortgages, resulting in a far fairer system that is easier to understand.

The Dynamic Annual Rate, or DAR, will calculate the cost of borrowing differently to the APR system in that it will take into account charges, fees, and set up charges. It will also base the calculations on how long the borrower is likely to keep the loan on rather than on the set term of the loan. This is because many borrowers tend to pay off the loan after a certain period, such as at the end of a fixed rate period, and switch to an alternative loan package that offers better value for money.

One official from the Council of Mortgage Lenders stated: "The Dynamic Annual Rate provides a useful basis for discussion on the ways mortgage lenders can make consumer information as comprehensive, accessible and meaningful as possible. The DAR itself does not provide all the answers, but it is a useful measure for consumers who are uncertain about how long they will hold their mortgages, and the intermediaries who advise them."

However, it has been stressed that at present the DAR measure is still under research and is not a definite replacement for the APR, with one official adding: "We are certainly not advocating it. It's a piece of research to reflect upon: nothing more than that."

Tom Smith
3rd October 2007

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