What Is A Comparison Rate And How Important Is It Really?
If you’ve heard the term ‘comparison rate’ you might be wondering what it’s all about and how it differs from an interest rate often advertised by lenders.
A comparison rate is a rate that all lenders by law must display next to their advertised interest rates. It’s a rate which takes into account some of the fees and charges of a home loan to give you a more accurate representation of a loan’s interest rate once the costs are taken into account.
It is designed to help you understand the overall cost of a loan and make it easier to compare loans from different lenders.
What does a comparison rate account for?
- Amount of the loan
- Loan term
- Repayment frequency
- Interest rate
- Fees and charges
What does a comparison rate not include?
- Government charges such as stamp duty or mortgage registration fees
- Fees and charges associated with loan options or events that may or may not be used by the borrower, such as early repayment or redraw fees
- Fees and charges which aren’t available at the time the comparison rate is provided
- Cost savings such as fee waivers or the availability of interest offset arrangements which can influence the cost of a loan
What’s the difference between an interest rate and the comparison rate?
A home loan interest rate only reflects how much interest you will be charged per year on the balance of your loan, which affects your monthly repayments.
The home loan comparison rate, on the other hand, compares the overall cost per year of the loan, including most of the fees and charges that may crop up at the start of the loan or throughout the year.
A home loan comparison rate includes the interest rate and also summarises much more information than just that.
This is what the rates will look like when you’re exploring lenders’ options:
Why pay attention to comparison rates?
By looking at the comparison rate you might be surprised to see that sometimes the loan with the lowest interest rate isn’t always the cheapest option.
For example, a loan with a low-interest rate might have fees and charges involved that would essentially make it have a higher comparison rate.
While comparison rates can be a good starting point, they’re not the only thing to consider when shopping around for a loan. It’s also important to compare the other features of the loan to see if it works for you.
This is where a great mortgage broker can assist you, in making sure the loan you choose suits your individual circumstances.
If your LVR is under 80%. And you are prepared to review your loans every 2-3 yrs (esp when they come off fixed).
Then making a decision around the Comparison rate alone, may not be serving you. If you are reviewing your loan every time fixed rates come up.
It may only cost you $350 or so to leave that lender and look for a better rate – so the Comparison rate which is over a 25 yr term is not a “true” reflection of cost over the 2-3 yr term. If you want to discuss and flesh this out further feel free to call us.