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Rate for comparison..
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scheming_gypsy
Posts: 18,410 Forumite
What does that mean?
Although i can't remortgage for another 10 months i'm keeping an eye on the adverts and their rates but 'rate for comparison' always crops up. Now i know what rate means and i know what comparison means but the mortgage adverts never seem to make sense.
You'll see 2 years at (for example) 4.89% and then 5.06% thereafter and a rate for comparison at about 5.6%. How can you use the higher figure to compare rates if both of your mortgage rates are lower?
if that makes sense
Although i can't remortgage for another 10 months i'm keeping an eye on the adverts and their rates but 'rate for comparison' always crops up. Now i know what rate means and i know what comparison means but the mortgage adverts never seem to make sense.
You'll see 2 years at (for example) 4.89% and then 5.06% thereafter and a rate for comparison at about 5.6%. How can you use the higher figure to compare rates if both of your mortgage rates are lower?
if that makes sense
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Comments
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Hi scheming _gypsy
It sounds like you have a good deal that may well deteriorate in 10 months to a standard variable rate (SVR). Adverts are perfectly legal in touting their headline discount rate that lasts for all of two years and then saying the overall rate is total pants%. This overall rate assumes that you will stick with the product in an insane, financially irresponsible, trance for the full term of the mortgage. High fees are also a factor as they can warp APR figures. Perhaps their is a need for more transparancy in the advertising of financial products. This will all end up in fine print and we will have to buy 64 inch TVs and 1 metre wide papers to read it.
J_B.(Offending the imperialists and metricians in equal measure,)0 -
clear as a muddy welsh donkey there Joe, but thanks anyway...
i'll try and read it again when sober.0 -
Their is no need to worry when you have the fsa to assist. See:-
http://www.fsa.gov.uk/consumer/07_MORTGAGES/compare/which_rate.html
The FSA are not the food standards agency but the financial services authority. Via the keyfacts illustration link in their example. Compulsory payment protection insurance premiums are seen to increase the overall APR figure.
J_B. (The FSA kick !!!!!! once in a blue moon.)0 -
The rate for comparison includes the prevailing rate after your discounted rate comes to an end....not sure whether its over a five or twenty five year period.
eg Discounted rate 4% for 2 years, SVR 6% for 23 years, rate for comparison is say 5.8%.
I always ignore the rate for comparison as Im well gone by the time the uncompetitive SVR rates kick in!!!illegitimi non carborundum0 -
That's how i thought it worked Froggitt but i'm pretty sure on the advert i saw both rates were lower than the comparision rate, which is what confused me.0
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scheming_gypsy wrote:That's how i thought it worked Froggitt but i'm pretty sure on the advert i saw both rates were lower than the comparision rate, which is what confused me.
The reason for this is that the Rate for comparison also takes into account any fees that are payable to set up/close the mortage for example valuation and arrangement fees and any discharge fee. They also take into account how the lender charges interest ie. daily, monthly or annually. It is basically the APR. The idea is to try and illustrate the true cost of a mortgage. Take the two fictional mortgages I give below.
Mortgage 1 - 5% interest rate, £500 arrangement fee, £150 mortgage discharge fee.
Mortgage 2 - 5% interest rate, no arrangement fee, £300 mortgage discharge fee.
On a loan of £100,000 over 10 years you would pay, lets assume, £50,000 in interest on both.* But on mortgage 1, you would have paid £650 in fees so a total of £50,650; and on mortgage 2, you would have paid £300 in fees so a total of £50,300.
Therefore, mortgage 2 actually costs you less and would therefore have a lower rate for comparison, say 5.1, than mortgage 1 that may be 5.2%. The rate for comparison will be higher than the headline rate because of the fees beng included in the total cost calculation as if they were additional interest.
If you have been looking at broker advertising, the rate for comparison should also include any broker fee (after all, it is an extra cost to your mortgage).
Having said that, I would also echo the sentiments of those who have said that they are not completely accurate because they assume that you will stay with the lender for the full mortgage term and never switch to get a better rate than the 'revert to' or standard variable rate once your deal has finished.
For this reason, when looking at a deal for a client, I will always do a 'cost over period' calculation that will compare the true cost (including interest and fees) of the deals on offer over a period of time. If the cstomer is looking at 2 year deals, then the calculation is done over 2 years; looking at 5 year deal, then that calculation is done over 5 years.
Fail to see how advertising could become any more transparent without having pages of text following each one.
*before anyone starts, I have picked figures and made calculations for simplicity's sake and know that the interest payable would be less if the capital reduced as per a repayment mortgage or if interest was charged daily rather than annually. Just making it easy for myself.
Hope this helpsI am an IFA (and boss o' t'swings idst)You should note that this site doesn't check my status as an IFA, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.0 -
Nice one, makes more sense now.0
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HelpWhereIcan wrote: »The reason for this is that the Rate for comparison also takes into account any fees that are payable to set up/close the mortage for example valuation and arrangement fees and any discharge fee. They also take into account how the lender charges interest ie. daily, monthly or annually. It is basically the APR. The idea is to try and illustrate the true cost of a mortgage. Take the two fictional mortgages I give below.
Mortgage 1 - 5% interest rate, £500 arrangement fee, £150 mortgage discharge fee.
Mortgage 2 - 5% interest rate, no arrangement fee, £300 mortgage discharge fee.
On a loan of £100,000 over 10 years you would pay, lets assume, £50,000 in interest on both.* But on mortgage 1, you would have paid £650 in fees so a total of £50,650; and on mortgage 2, you would have paid £300 in fees so a total of £50,300.
Therefore, mortgage 2 actually costs you less and would therefore have a lower rate for comparison, say 5.1, than mortgage 1 that may be 5.2%. The rate for comparison will be higher than the headline rate because of the fees beng included in the total cost calculation as if they were additional interest.
If you have been looking at broker advertising, the rate for comparison should also include any broker fee (after all, it is an extra cost to your mortgage).
Having said that, I would also echo the sentiments of those who have said that they are not completely accurate because they assume that you will stay with the lender for the full mortgage term and never switch to get a better rate than the 'revert to' or standard variable rate once your deal has finished.
For this reason, when looking at a deal for a client, I will always do a 'cost over period' calculation that will compare the true cost (including interest and fees) of the deals on offer over a period of time. If the cstomer is looking at 2 year deals, then the calculation is done over 2 years; looking at 5 year deal, then that calculation is done over 5 years.
Fail to see how advertising could become any more transparent without having pages of text following each one.
*before anyone starts, I have picked figures and made calculations for simplicity's sake and know that the interest payable would be less if the capital reduced as per a repayment mortgage or if interest was charged daily rather than annually. Just making it easy for myself.
Hope this helps
***'cost over period' calculation**** Brilliant ! Never did I come across this terminology in the confusing world of mortgage's seriously. Been learning n researching for only a little while though. From now onwards I shall base my calculations for comparison purpose's on this great principle of your's (cost over period' calculation). U see as a first time buyer I feel after doing my own research, that whoever I have spoken to/dealt with are just trying to mug me or speaking in their own interest and dont give a damn about me . Things get so confusing and there are'nt many people around who give honest, simple and straightforward advise in the interest of first time buyers like me who r learning n struggling to understand this whole mortgage (aka rocket science business) for many including me! I am greatful for your advice Dear Sir. Extremely helpful .I have read few other posts by you as well. all good stuff.keep up the good work. Regards, Physique Artist
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