August 08, 2016
Whenever you see an advert for a mortgage or other loan, 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?
Comparison rate aims to incorporate all of the costs of a loan into a single figure – including the interest rate, fees and charges, repayment terms and term of the loan. It adds all of these costs into a single figure and assumes a standard mortgage size of $150,000, being repaid over 25 years.
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, comparison rate can also be confusing. For example, the average mortgage size is now about $340,000. If your loan is much larger (or smaller) than the $150,000 used in the comparison calculation, it may be misleading to rely on comparison rate. A fixed fee of $395 per year is much more significant on a loan of $100,000 than it is on a loan of $1,000,000.
Mortgage Choice has tools that factor in all of the costs of a home loan to make the total cost transparent and easily comparable. Ask us about our Home Loan Doctor tool.