Mortgage blog: EU ruling set to make costs even more difficult to understand

Posted 7 August 2013 by Keith Osborne

New EU rules set to come into force later this year are set to make it even more difficult for consumers to compare the costs of mortgage deals. That is the view of leading experts after a survey from Which? found that only a minority of people can already recognise the cheapest mortgage deal.

The EU rules will make it compulsory for lenders to display a new annual percentage rate (APR) on all of their literature. This new APR will be calculated using the highest level that the lender's SVR has reached in the previous 20 years and will be displayed alongside the existing APR.

New APR will ‘further complicate' consumer choice

The EU credit directive is expected to be approved later this year. It will compel lenders to tell borrowers the maximum interest rate they have charged over the past 20 years, and display this figure on all of their literature. The Daily Telegraph reports that "the new rate will need to be displayed as prominently as other rates, and will apply to most mortgages sold in Britain, since only those that have a fixed period of more than five years will be exempt". Lenders will have until 2015 to comply.

"Most consumers struggle to understand APRs and the total costs of a mortgage as it is without further complicating the situation," says Keith Osborne from "Existing APR figures are already misleading as they assume that borrowers won't switch their mortgage at any point during the term. Very few people end up paying the APR - the average rate, assuming you keep your mortgage for the full term - and so they are already an unhelpful tool for comparison. Adding yet another figure is preposterous."

The news comes after a Which? survey found that the vast majority of mortgage borrowers already struggle to understand mortgage costs. A sample group of 1,001 borrowers were asked to rank five mortgages, all fixed-rate, two-year deals based on a £100,000 loan, in order of cost.

Only one in 10 placed the mortgages in the right order with just a quarter were able to identify the cheapest and most expensive deals. This is despite over half the respondents saying that they found the exercise ‘easy'.

"Clearly, it's already hard for people to understand which mortgage deal offers the best value," adds Osborne. "Throwing yet another APR figure into the mix is only going to further confuse borrowers and make it less likely that people will find the best deal for them."

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