Savers may benefit from loan benchmarks

Mon, 24 Sep 2007

The next few months will see banks and building societies discussing a new way of comparing loan costs .

Called the Dynamic Annual Rate (DAR), the new interest rate measure could help borrowers save money . The real cost of a loan is worked out by including the duration and the regularity of repayments .

The current way of comparing loans is the Annual Percentage Rate (APR). This method assumes that loans are ongoing until they mature, so the loan cost is not always accurate.

The Council of Mortgage Lenders (CML) found that the majority of mortgages are not held for the full term, they are repaid before.

The CML are hoping for an industry-wide debate on if the DAR should be used as well as the APR for comparing loans.

A CML spokesman said, "At the moment, this is just an opportunity for a bit of blue-sky thinking. This may be an incredibly useful illustration for letting customers see the variability of mortgage costs . But we also have to ask if it will confuse customers. Will they be able to tell the difference between the two rates and what they offer?

"This will provide an effective counter argument to the idea that DAR would be a beneficial introduction."

Research by Grant Thornton, financial consultants, highlighted the merits of DAR and that borrowers could use it to assess the pros and cons of remortgaging .
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