Grant Thornton’s Financial Services Group says the Annual Percentage Rate (APR) is an ineffective and confusing indicator of mortgage costs and should be replaced with a new measure known as the Dynamic Annual Rate (DAR).

DAR would include all relevant fees, interest and early repayment charges and can be calculated for any period within the mortgage term, unlike APR.

The APR arose from the need to have a standard measure of cost to allow comparisons on short-term credit agreements such as hire purchase and personal loans. It is also used as an indicator of mortgage costs, but the underlying assumption that the loan is held for the full-term is no longer valid, because increasing numbers of mortgages are terminated early.

The group believes DAR represents the average annual interest rate over any chosen period across the loan, rather than only at the full-term as in the APR, which makes it more relevant and easier to compare.

Paul Cook of Grant Thornton’s Financial Services Group said: “As many consumers now re-mortgage their houses between two and five years after taking their loan on, the DAR allows them to realistically compare the cost of mortgages across different lenders and products, including all charges and any early repayment penalties that may apply.

“Recently the FSA has expressed its concern at the increasing complexity of the mortgage market. Using a measure such as the DAR makes it far easier for consumers to understand exactly what they are comparing. In addition, it ensures loan providers and advisers meet their obligations under TCF (Treating Customers Fairly).”