Mortgage Interest Rate Calculations in Chaos as Lenders Adhere to New Guidelines

Strategic Insights -

Mortgage lenders in the UK are facing a sea of confusion as they adhere to new guidelines on calculating annual percentage rates (APRs) on discounted mortgage rates. The Local Authorities' Co-ordinating Body on Food and Trading Standards (LACOTS) has published guidelines stating that lenders should calculate discount-rate APRs in the same way as fixed-rate loans. This move has been met with dismay by many lenders, who claim that the new system will create more complexity and confusion for borrowers.

Key Takeaways:

  • The Local Authorities' Co-ordinating Body on Food and Trading Standards (LACOTS) has published guidelines stating that lenders should calculate discount-rate APRs in the same way as fixed-rate loans.
  • Lenders had been calculating the APR on discounted mortgage rates differently from fixed-rate loans, taking the cut-price rate for only a short period and then using a variable rate.
  • The new guidelines will require lenders to calculate the APR on discount mortgage rates in the same way as fixed-rate loans, potentially leading to lower APRs for discount loans.
  • The Office of Fair Trading is set to review the Consumer Credit Act in a few months' time, which may lead to changes to the regulations governing APRs.
  • Lenders such as Nationwide, Alliance & Leicester, and the Woolwich have already changed their APR calculations for fixed-rate loans in response to the court ruling.
  • The new rules are causing confusion among borrowers, with many lenders arguing that the system is unfair and misleading.

Statistics:

  • 20 different rates of interest are currently available from Abbey National (Council of Mortgage Lenders source).
  • 6.4% and 8.2% were the APRs quoted by competitors and Nationwide, respectively, on fixed-rate loans before the change in calculation methods (Nationwide source).
  • The discount loan at 2.99% has an APR of 7.8% under the current rules, but will fall substantially under the new guidelines (Chelsea building society source).
  • The Office of Fair Trading is set to review the Consumer Credit Act in a few months' time, which may lead to changes to the regulations governing APRs.

Sources:

  • "Guidelines for the Calculation of APRs on Discounted Mortgage Rates" by Local Authorities' Co-ordinating Body on Food and Trading Standards (LACOTS).
  • Article by Margaret Dibben, quoting unnamed sources from National & Provincial, Nationwide, and the Woolwich.
  • Quote from Andrew Boyce, marketing controller at Alliance & Leicester.
  • Quote from Dennis Brockwell, divisional director, banking and savings at Nationwide.
  • Quote from Keith Hale, senior executive officer at LACOTS.
  • Article by the Council of Mortgage Lenders, quoted by Margaret Dibben.