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The usefulness of the APR for mortgage marketing in the USA and the UK

Joshua Buch (La Salle University, Philadelphia, USA)
Kenneth L. Rhoda (La Salle University, Philadelphia, USA)
James Talaga (La Salle University, Philadelphia, USA)

International Journal of Bank Marketing

ISSN: 0265-2323

Article publication date: 1 April 2002



Regulators in the UK and the USA recognize the need to assist borrowers that face a huge number of mortgage products with a multitude of fee combinations offered by a large number of lenders. For over 25 years they attempted to make the mortgage selection process more borrower‐friendly but, for many reasons, the efficacy of the chosen comparison tool, the Annual Percentage Rate (APR), is questionable. Because many consumers are either unwilling or unable to make price comparisons between mortgages based on the APR, we suggest replacing the APR with a new measure called the Annual Effective Rate (AER). The AER is based on the actual length of time the borrower expects to maintain the loan and the assumption that all up‐front loan costs are financed. In addition, we suggest that this comparison rate only be presented for true fixed‐rate loans and that all up‐front cost categories that are used in computing the AER be standardized.



Buch, J., Rhoda, K.L. and Talaga, J. (2002), "The usefulness of the APR for mortgage marketing in the USA and the UK", International Journal of Bank Marketing, Vol. 20 No. 2, pp. 76-85.




Copyright © 2002, MCB UP Limited

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