The limitations of Comparison Rates

I get a lot of clients asking about the comparison interest rate when reviewing loan options. The intent of the Comparison Rate is absolutely commendable, which is to try to compare one home loan to the next on a like for like basis. The calculation does have its’ limitations however. The rate is essentially based on a loan amount of $150,000 over a 25 year term and assumes Principal and Interest repayments. Accordingly if your home loan meets that criteria they may well be useful. However the average loan size is Australia is now $373,195 (June Qtr 2016) so the value in this calculation is rather limited and to some extent can be misleading. Additionally when looking at Fixed Rate loans different lenders do different things at the end of a fixed rate term with some seeing the loans revert to a “Standard Variable Rate” and others to a discounted rate so there is great volatility when looking at Comparison Rates for Fixed Rate loans. Care needs to be taken when referencing the Comparison Rate and this is where we can help you in assessing the most appropriate loan for you.

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