What is a Home Loan Comparison Rate?
A comparison rate is a way to help consumers identify the true cost of a loan. In the case of a home loan the comparison rate can help you to see what the actual cost of the loan will be, including fees and not just the annual percentage rate.
A home loan comparison rate tries to enable customers to compare ‘apples with apples’ when determining the true cost of a home loan from different providers.
A comparison rate is originally designed to allow customers to compare credit providers on an even playing field.
The comparison rate is usually the second percentage rate you see in an advertising and there are strict guidelines on how a comparison rate must display next to their advertised interest rates.
Comparison rates were made mandatory to try and stop lenders from advertising incredibly low interest rates that lured unsuspecting borrowers into loans that actually cost them far more than they expected. By including the costs of the loan into the comparison rate.
What a home loan comparison rate includes
A comparison rate is made up of the following:
- Amount of the loan
- Term of the loan
- Repayment frequency
- Interest rate
- Fees and charges connected with the loan
What a home loan comparison rate does not include
The comparison rate does not include fees and charges that may occur or non-standard event or cost – such as redraw, early termination fees, progress payments or fees charged by some institutions when you decide to switch lenders.
In addition, government and statutory charges are not included – as these are standard regardless of the type of loan or lender.
In short, comparison rates do 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.
Geoff Wilson is an Urban Money Lending Manager with almost three decades lending experience under his belt.
Geoff says, “While comparison rates are a useful tool to get a baseline understanding and cost of a home loan of it may not provide the complete picture.”
Let’s look at a Urban Money example
So let’s look at a comparison rate example. Let’s say you see a home loan rate advertised as follows: 3.97%, 4.12% comparison rate like the example from Urban Money.
Geoff says, “The key here is to read the details on how the comparison rate is calculated. In this example it says ‘The comparison rate is based on a $350,000 loan over 30 years and warns, this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.”
“This means that for a loan of $350,000 over 30 years at 3.97%, with all relevant fees and charges taken into consideration, the actual amount the loan will cost is 4.12%,” Geoff adds.
Every time you change one factor of the equation, the comparison rate may change. As a result, while comparison rates are a good starting point, they may not be the defining factor when you chose you home loan.
What else should you consider?
Remember, a loan is about more than the cost – it is also about how the loan fits with where you are in life and your lifestyle needs.
Geoff said, “You may also consider other loan features and flexibility factors such as offset and redraw, account splitting features, online banking and other factors to make sure you get a home loan that suits your lifestyle and plans for the future.”
At Urban Money our customers have the added advantage of choosing a home loan from our own range of products or from a panel of other lenders by using our mortgage broking service. Either way, we can walk you through the process and help you to find the right loan for your specific situation.
In the coming weeks we will take a look at what questions you should ask your mortgage broker or bank when applying for a home loan. These tips will help ensure you get the best home loan to suit your needs now, and into the future. So bookmark our blog and stay in touch.
Or if you would like to speak to someone today about your home loan contact us here.