When you’re shopping for a home loan, you’ll notice lenders publish something called a comparison rate. Read on to find out exactly what a comparison rate refers to so you can make better-informed decisions when comparing loan products.
What Is the Comparison Rate?
When you look at the interest rates, you’re only seeing one cost of your home loan. You’ll also pay a variety of fees. These fees are charged during the application process, throughout the loan, when you switch loans, and when the loan ends.
The comparison rate takes all these costs into account. It factors in the interest rate as well as other associated fees and costs that you’ll have to deal with during the life of your loan.
So, for example, a home loan product from Lender A might come with an interest rate of 4.87% but the comparison rate is 5.12%. Another lender, ‘Lender B,’ may have a comparable loan product with a lower interest rate of 4.67% but the comparison rate is 5.30%, which is higher than Lender A’s comparison rate. Even though Lender B has a lower published interest rate, the loan may be more expensive. You’d only know this if you took the time to look for all the associated fees and added them up – or by looking at the comparison rate.
By looking at the posted comparison rate, you can get a clearer idea of how much your loan will cost you – it’s also easier to compare loan products.
How Comparison Rates Are Calculated
Comparison rates will include:
- The actual interest rate the lender charges.
- All standard fees and charges including the valuation fee, monthly account fees, and the settlement fee – these fees can add up to several thousand dollars over the entire loan period.
- Payment frequency – a higher payment frequency, such as paying every fortnight instead of every month, will lower your loan balance, reducing the overall interest you’ll pay and the comparison rate.
- Loan term – Banks will usually use a 25-year term to calculate the comparison rate. This is really important to consider as most home loans are set for 30 years.
Why Do Lenders Post Comparison Rates?
Lenders are actually required by law to post comparison rates along with their interest rates. This is a requirement designed to protect borrowers. Basically, lenders can’t just post a low interest rate and then tack on hidden costs to the loan, making the loan more expensive than the borrower realises.
A lot of people don’t go through and add up all the associated fees when comparing loan products. Without the comparison rate, borrowers might not have any idea that one loan is actually a lot more expensive than another because of the fees involved.
Do All Loans Come with Comparison Rates?
Only loans that are regulated by the National Consumer Credit Protection (NCCP) Act come with comparison rates. Most residential loans have comparison rates, including low doc loans. No doc loans, commercial loans, and margin loans, however, won’t have a comparison rate.
What Isn’t Included in the Comparison Rate?
Comparison rates don’t include all fees, so you still need to look over all the associated charges you might pay.
- Things like early repayment fees, redraw fees, and break costs, which are fees related to how you use your loan, aren't included.
- The comparison rate also doesn’t include government stamp duty or Lender’s Mortgage Insurance.
- If you have to hire a conveyancer when you apply for a loan, you’ll incur further fees – these aren’t included in the comparison rate either.
Is Looking at the Comparison Rate Enough to Make a Good Decision?
The comparison rate does offer greater clarity into the cost of different loan products, but you shouldn’t rely on it alone to make a decision. There are too many other important factors that determine not just the cost of the loan, but also how suitable the loan is for your individual requirements. You’ll gain even more insight by talking with different financial professionals, such as a professional credit provider and a mortgage broker.
How to Look Beyond the Comparison Rate When Comparing Home Loans
The comparison rate is a useful tool when shopping for home loans. In order to get the best loan for you, however, you should also look at other factors that will influence how much you’ll ultimately pay and how worthwhile a particular loan product is to you.
- Once you narrow down your lenders, add up all the costs including LMI – which will vary depending on the LMI provider your lender uses – the interest, government fees, loan fees, and any discounts.
- Consider the loan type and how this will impact what you can afford. Fixed rate loans, for example, are more expensive upfront but they may help you if you wouldn’t be able to afford higher interest rates in the case of a variable rate loan.
- Assess how the loan features will affect the loan. Features like free early repayments and an offset account can help you reduce the interest you’ll have to pay. You may also be able to pay down your loan faster. Decide if you might use these features in the future and if it’s important to make sure you have a loan product with flexible features.
- Factor in your loan term. A longer term means more interest. Remember, comparison rates are calculated for 25-year terms. If you’re paying down your loan for 30 years, your true costs will be higher.
- Know what you want out of your loan. Every borrower is different, not just in terms of what you may qualify for, but also in terms of what you want from your loan. For example, is it important to have a line of credit loan so you can pay for a renovation? Maybe you expect to refinance in three or four years to a more flexible loan, but you're happy with a basic variable rate now.
There are so many factors that go into finding the perfect home loan for you – and a loan that you can afford. To help you compare lenders, use our Loan Comparison Calculator. This will help you see how much you can save depending on what features you use, the loan type, the term, and how much you’re borrowing.
Choosing the Right Loan for You
Choosing a mortgage is one of the most important financial decisions you’ll make. Every resource available to you that can bring more clarity to the decision process can potentially help you save money and find a loan that’s right for your current financial situation and future goals.
Our mortgage brokers can help you understand the comparison rates, as well as what else you can expect from the different loan products available to you. Fill out our online enquiry form today. You can also call (07) 3146 5732 to speak with one of our home loan specialists.