Understanding comparison rates could make the difference of saving hundreds (or even thousands) of dollars for you.
Loans with the lowest interest rate aren’t always the best option. It's important to research different products and loan providers, taking into consideration your personal circumstances.
If you’re in the market for your first home loan and have seen the term “comparison rate” but aren’t sure what it means and how it’s important, we're here to help!
What is a comparison rate?
- A comparison rate factors in the interest rate on the loan as well as certain fees and charges relating to a loan over its term.
- The aim of the comparison rate is to help you identify the true cost of a loan and compare the features offered by different banks and mortgage providers.
- The formula for calculating a comparison rate is regulated by the Consumer Credit Code. All Australian financial institutions and mortgage providers use the same formula.
What a comparison rate doesn’t include:
- Government fees and charges like stamp duty and registration fees.
- Optional fees and charges associated with customer behaviour when using the loan like early repayment or redraw fees.
- Any fees and charges which aren’t available at the time the comparison rate is provided.
- Potential cost savings such as fee waivers and rebates or the availability of interest offset arrangements which influence cost.
The problem with comparison rates:
- The loan amount used to calculate the comparison rate is $150,000. This doesn’t really reflect the markets average loan size. Given the equation used to calculate the comparison rate, this can largely distort the true cost of the loan. In other words, the impact of fees on a $1m loan will be significantly different in percentage terms.
- The loan term is 25 years and typically doesn’t line up with the average life of a loan.
- Market volatility means that interest rates move to change the equation.
Our view is that the comparison rate (and even the interest rate) is a very basic way to look at the mortgage market and the true cost of a loan.
Instead, have a more holistic look at your home loan with a 2–4-year time horizon – where do you now sit in the market, and what’s your best options that suit your loan and personal situation. If your home loan works well for you now great. Review it every 12-24 months and if it becomes less competitive in the market, let’s make an adjustment.
Contact us today to dive headfirst into the property market with confidence knowing we will steer you in the right direction.