Confusion over mortgages is rife, research from John Charcol reveals.
Only 11% of mortgage borrowers pick a mortgage based on the headline rate while a further 29% don’t know which rate to base their decision on, it claims.
Ray Boulger, senior technical manager at John Charcol, says such findings are very worrying as they suggest a year after statutory mortgage regulation a huge number of borrowers are in danger of buying the wrong product.
“If the 33% of borrowers who base their decision primarily on the annual percentage rate (APR) plan to keep their mortgage for its full term and consequently in most cases stay on an uncompetitive rate after their initial deal ends, using the APR would be sensible, but with the average life of a mortgage now down to under 4 years we know this won’t happen,” he says.
Boulger adds: "Using a comparison tool that is normally calculated on a 25 year term, with typically between 80% and 92% of that term based on a standard variable rate (SVR) which most borrowers will only pay for a short period, is guaranteed to mislead the majority of borrowers who will either remortgage shortly after their initial deal has ended or will take a new rate from their existing lender.”
John Charcol’s findings come in the wake of the FSA’s campaign to simplify the mortgage world. The FSA’s research revealed that over half of all consumers don’t know what APR stands for.
But Boulger says this is still an issue when consumers do not understand everything about a product they are buying and increases the risk of subsequent complaints.
“It is therefore clear that ongoing consumer education is a priority and some of the new FSA initiatives should help. However, this will only be true if that education focuses on the fact the APR should not be the paramount consideration for the vast majority of consumers as far as mortgages are concerned, unless the rules are changed so the way APRs are calculated are relevant to the modern mortgage,” he adds.
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