A proposed change to how interest rates are measured in the UK could make it much easier for people to compare the costs of mortgages. The new way of measuring interest rates would make the cost of borrowing more clear. The Council of Mortgage Lenders says that the new way to measure interest rates, called the DAR or the Dynamic Annual Rate, will make it much easier for consumers to understand how much it costs to borrow money. This will make it easier for people to compare loans to find the best deal.
Currently, lenders in the UK use the Annual Percentage Rate measure, also known as the APR, in order to calculate the cost of borrowing. When the APR is used to figure out how much it will cost to borrow money, the lender assumes that the loan will be kept for the full 25-year term. But since many people change mortgages before the 25 years are up, the APR is not a good way to compare. Also, the APR doesn't take into account any fees, charges, or arrangement fees. The APR is based only on the amount borrowed.
The DAR interest rate will be different because it will take fees, charges, and arrangement fees into account. It will also be figured out over the expected length of time the loan will be kept. This is because many people who take out Home loans and mortgages pay off the loan in full after a few years, usually when a special offer like a fixed rate ends and they switch to a better deal.
Experts say that the DAR calculation will make it easier for borrowers to figure out how much a loan will really cost and will make it much easier and more accurate for them to compare the costs of different loans. This will help them figure out if and when it would be better for them to switch from one product to another. It will also let them see how changes in interest rates will affect the costs of home loans and mortgages.
An official from the Council of Mortgage Lenders said that this new measure makes information for consumers more "comprehensive" and "meaningful," and that it could be very helpful for consumers who aren't sure how long they will keep their home loan or mortgage before paying it off.
