Truth in ads coming

A QUEENSLAND financial research company has developed a vital tool in the fight for honesty in advertising.

A standard cost calculation developed by Cannex could simplify the task of choosing a loan with a single figure included on all financial institution advertising.

Already adopted in the UK, the average annual percentage rate or AAPR is a measure of all costs associated with a loan, including fees and interest rates.

Cannex managing director Andrew Willink said this standard calculation provided a basis to compare the competitiveness of different loans available in the marketplace.

“The AAPR allows financial institutions to find out how competitive they are, and it’s a snapshot of what is the cheapest loan in the marketplace by combining all the costs of a loan,” Mr Willink said.

This figure has already been adopted by parts of the financial industry and in NSW there is a move to make the AAPR compulsory on all advertising for loan products.

In the UK, home loan advertising includes an annual percentage rate figure in bigger bold type next to the advertised mortgage rate.

A single published figure on all loan advertising would arm consumers with a simple way to compare the cost of the different loans in the market.

WA Home Loans managing director Tim Holmes said WA Home loans had been a proponent of AAPR for some time.

“I think the AAPR goes a long way to take away the confusion in trying to evaluate which loan to take,” Mr Holmes said

“The AAPR grosses all the charges up and averages it out over a period of a year.”

Apart from creating a standard comparative figure for loans, Mr Holmes believes the AAPR simplifies loan products on offer for consumers.

“The AAPR goes a long way to take away the confusion in trying to evaluate which loan to take.”

– Tim Holmes

“This is a formula for advertising, it takes out a whole heap of confusion,” Mr Holmes said.

WA Home Loans believe the AAPR is important enough to include in their advertising.

“Other organisations are subject to showing some transparency in pricing and how they do things, financial institutions should not be any different,” Mr Holmes said.

A move to standardise the way interest rates are advertised has not been uniformly met with a positive response.

“The banking industry is lobbying against the AAPR,” Mr Holmes said

Mr Holmes accepted that there were problems with the model.

“It’s not perfect, but it’s some sort of template where you can compare one product with another,” he said.

“It takes a lot of research to find out what you are being charged.”

BankWest manager media relations Peter Knight said the AAPR figure was available to consumers in the loan document.

“The bank is obliged under the consumer credit code to provide certain details, and that’s all spelt out in the loan document,” Mr Knight said.

BankWest also thought a number of specific loan features did not easily fit into the AAPR formula.

“With products with offset features, the attachments don’t easily plug into a formula which makes it more difficult to come up with an AAPR,” Mr Knight said.

The BankWest JetAway loan is an arrangement with Ansett where frequent flyer points are made available depending on size of the loan.

“For example, you get 20,000 points when you take out the loan and then based on a $200,000 loan you can earn enough points to fly to Hong Kong in the first year or London in the second year,” Mr Knight said.

“There’s many features you may not be able to work into that formula.”

In 1993, when Cannex first developed the AAPR, the home loan market was similar to now, Mr Willink said.

Advertised variable home loans had very low initial rates moving to a high rate.

Cannex claim this environment can make it very difficult for a consumer to calculate which institution is offering the best deal.

Cannex have more recently developed a start rating for mortgages based on a combined analysis of the loan cost and 120 different features including the history of the loan over the past 24 months.

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