Interest rate verses comparison rate , what does it mean?

Whenever you see an advert for a mortgage loan from a bank/lender, you will see the interest rate and also the comparison rate. For example, it might say interest rate 3.99%, comparison rate 4.45%. What does this mean?

 

Put simply, the comparison rate for a home loan is “a rate that includes both the interest rate and most fees and charges payable during the life of the loan, expressed as a single percentage”. The comparison rate adds all of these costs into a single figure, and assumes a standard mortgage size of $150,000 being repaid over 25 years.

 

The comparison rate is intended to help borrowers compare the total cost of a loan across different home loan products and lenders. Comparison rates are often of assistance when looking at the overall ‘true cost’ of different loans. However, be aware the comparison rate does not really give you the true cost of a loan - it merely gives a good indication of a loan’s true cost.

 

While it is certainly very important to look at all of the costs and features of a home loan before deciding on which product is right for you, the comparison rate can also be confusing. 

 

Different loan amounts and loan terms will result in different comparison rates. Costs such as redraw or early repayment fees, and cost savings such as fee waivers, are not included but obviously may influence the cost of the loan, as will the changeable nature of variable interest rate loans.

 

As an example, assume that you are borrowing $340,000 from your lender. Since your loan is much larger than the $150,000 used in the comparison rate calculation, it may be misleading to rely on the comparison rate. In this scenario, a fixed loan fee of $395 per year attached to this home loan is of much more significance on a home loan of $150,000 than it is on a loan of $340,000.

 

At Mortgage Choice, we have tools that factor in all of the costs of a home loan to make the total cost more transparent and easily comparable – simply ask us about our Comparison Rate calculator tool at your next appointment. 

Simply fill out the appointment form on this page or call our office on 08432 5688 or 0421 206 543 after hours. We can help you today with all your home loan needs. 

 

Posted in: Interest rates

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