What is a Comparison rate?

What is a comparison rate?

Looking for a suitable home loan can be difficult, and understanding all the different terms and features almost immediately is virtually impossible. Knowing the difference between a comparison rate and the advertised interest rate is one of the first questions many would-be homeowners ask.

All Australian banks and lenders are required by law to advertise a home loan comparison rate alongside the usual percentage rate of every home loan. Comparison rates came about to stop unscrupulous lenders from offering low introductory rates that may increase significantly after a period of time. They are also designed to make the system fairer, making it transparent to see home loans that may have an attractive interest rate, but have higher fees and charges over the life of the loan.

What does comparison rate mean?

As its name suggests, a comparison rate is a good way to compare home loans evenly. It can help those looking for a mortgage understand the true and overall cost of the loan. A home loan comparison rate takes everything into account and gives you an indication of how much you may pay in comparison to other mortgages, over the life of the loan. It takes into account all the fees and charges you may have to pay over the life of the loan, including things such as extra repayment fees, ongoing fees, application fees, establishment fees, settlement fees, valuation fees and even discharge fees.

If a home loan comparison rate is significantly higher than the advertised interest rate, it can be a good indication there may be a lot of fees and charges associated with that loan. If the comparison rate is very similar to the advertised interest rate, it can be a good indication that the cost of the loan won’t be much more than the advertised interest rate, assuming you make all the required repayments on time. Whether you are looking for a principal and interest home loan or an interest-only mortgage, the key thing to remember when you compare home loans is a home loan comparison rate is only an indication of what you may pay over the life of the loan. It is not a guarantee, and the overall cost may be higher or lower.

 

 

Fees can quickly add up on your home loan, whatever the loan amount you choose. Here’s a list of some of the possible mortgage fees and charges.

  • Establishment Fee: Sometimes called an application fee, this is a one-off payment when you start your loan.
  • Monthly Fee: A monthly fee can be part of what banks and lenders call ongoing fees or service or administration fees. These cover the cost of administering your loan and may also be charged on special home loan features such as redraw.
  • Fees for breaking a fixed-rate mortgage: Some banks and lenders will penalise you significantly for breaking a fixed-rate home loan. How much can depend on the lender and how much interest rates have come down since you took out your home loan.
  • Early exit fees: These may be charged if you pay out your loan in full early. These fees were banned in Australia in 2011, however mortgages taken out before them may still attract these fees.
  • Valuation Fee: Some banks and lenders can charge you to value your prospective home before approving your mortgage.
  • Lenders Mortgage Insurance: Some borrowers may be asked to take out LMI as a way of helping get their loan approved or lessening an interest rate. LMI is a one-off insurance premium that protects the lender in the event you default on your mortgage repayments.

What is the difference between variable and comparison rate?

When you begin to compare home loans, searching for a suitable mortgage you will see three kinds of interest rates – variable, fixed and comparison. They are all different and can all help you choose a suitable home loan.

  • Fixed rate: A fixed-rate home loan is a mortgage where the main advertised interest rate is fixed for an agreed period of time, usually between one and five years. Fixed interest rates can give you the consistency of knowing exactly what your repayments will be each week, fortnight or month, making budgeting easier.
  • Variable rate: A variable-rate loan means the interest rates can rise and fall over the life of your loan. Variable interest rates are influenced by a range of both internal and external interests, such as the cost of providing you with the home loan, or the strength of the national and international economy.
  • Comparison rate: As mentioned above, a home loan comparison rate is a guide to help you compare home loans by giving you an indication of how much you may pay over the life of the loan. It is individual to each home loan, taking into account the fees and charges of each one. A home loan comparison rate will be advertised next to the interest rate for both variable and fixed-rate mortgages.

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Mortgage Deal Interest Rate Annual Fee Comparison Rate Repayments
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Important Disclaimer: This information is intended as a guide only. The calculation of fortnightly and weekly instalments varies with the specific loan product. Higher loan repayments will be required on principal and interest loans where the instalment calculation is based on half the monthly payment for a fortnightly payment or a quarter of the monthly payment for a weekly payment. Details of terms and conditions, interest rates, fees and charges are available upon application. Mortgage House's prevailing credit criteria apply. We recommend you seek independent legal and financial advice before proceeding with any loan.

What does 0% comparison rate mean?

A zero per cent comparison rate can mean that you don’t pay any interest on a loan, often just for a set period. It may be something that you come across in car finance from time to time, but it can be something to be wary of. The overall cost of a loan such as this can be higher than you realise, and often there is a large balloon payment required to be made at the end of the period. It is always good practice to get as much independent advice on credit products such as these as you can.

How is a comparison rate calculated?

A home loan comparison rate is not a direct calculation of the fees and the advertised interest rate over the life of the loan. Given the different kinds of loans on the market today, the difference in how long loans can be taken out for, and the different interest rates available, it would be almost impossible to compare home loans in a uniform fashion using that calculation. Home loan comparison rates also can’t take into account any extra repayments you make and the benefits of them. Most Mortgage House home loans do not penalise you for making extra repayments, as long as the regular principal and interest, or just interest, repayments are up to date. Extra repayments mean you can pay off your loan sooner, which can save you a lot of money on interest over time.

Instead, the government has set some variables for every home loan comparison rate, so customers can have a clear indication of the cost of a mortgage if they choose that specific home loan. The calculation is a comparison interest rate for that exact loan, with those exact fees and charges, plus the interest rate, on a loan of $150,000 over 25 years. This is a key component in understanding why home loan comparison rates are only a guide, as most home loans would be taken out for more than $150,000 in today’s market, and most homeowners have mortgages for 30 years. But to be able to compare home loans, a standard has to be set.

How to work out a comparison rate?

Banks and lenders will work out the home loan comparison rate for you, but as a way of explaining them, it can be worthwhile to understand how they work.

To compare home loans, the $150,000 over 25-year rule is applied on each loan, and will take into consideration fees and charges, and may also take into consideration repayment frequency.

As a way of illustrating how to work out a comparison rate, we will use Mortgage House’s Advantage Owner-Occupied Home Loan COMBO 80 (Special) home loan as an example. To create a comparison rate, we will apply for a home loan of $150,000 over 25 years.

Adv interest rate: 3.64%

  • Loan amount: $150,000
  • Interest paid over 25 years: $78,672
  • Monthly fee: $10
  • Total monthly fee over 25 years: $3000
  • Other possible fees: Settlement fee of $250 plus $450 discharge fee – all possible fees
  • Total payable on a principal and interest loan is about $232,372

Home loan comparison rate: 3.79%

  • Interest paid over 25 years: $82,338.90
  • Total repayment of same home with comparison rate: $232,338

Another thing to remember when looking at how home loan comparison rates work, is to realise that the lower the loan amount, the higher percentage of the mortgage goes on fees and charges. With our Advantage Owner-Occupied Home Loan COMBO 80 (Special) for example, almost 1.6% of a $150,000 home loan is made up of fees and charges. When you borrow $300,000 with the same loan, that percentage drops to 0.86%. This is another reason to always realise that home loan comparison rates are simply a guide or an indication.

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What is a comparison rate on a home loan?

Home loan comparison rates can’t take into account the exact overall cost of your home loan, but they are a high-level tool aimed at producing transparency across the mortgage industry. If you use them as a guide only, they can be a great asset in your search for a suitable home loan. It is also important to keep in mind a home loan comparison rate may not include the amount and term of a particular loan, or the mortgage you are considering. The best way to use home loan comparison rates is to look at the rates for the amounts and terms that most closely match your own loan.

Comparison rates can simplify the experience of choosing a home loan, but homeowners may still find themselves with questions. If you have any questions about comparison rates or home loans, speak to the experts at Mortgage House for clear and specific advice. At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one. If you’re thinking of buying a home, you can contact us for advice about the possible best options for you when it comes to your mortgage.

There can be a couple of other relevant issues to keep in mind when looking for a suitable mortgage.

  • Loan flexibility: One of the most important things to consider when you are looking for a suitable mortgage for you and your family is flexibility. It can be easy to think a simple, no-frills loan with low fees can be right for you in your current situation. But it is also important to keep in mind that your lifestyle needs may change, and your home loan may not offer flexible features such as loan portability, should you decide to upsize to a bigger home.
  • Interest-saving loan features: Do some research and work out what home loan features are important to you. Features such as a 100 per cent offset accountand redraw facility are popular, and can give you the flexibility and freedom. You will be able to make extra repayments to reduce the balance of your loan and interest payable, so you can pay your loan off faster. Importantly, you will still have access to the extra funds if you need them.
  • Any hidden fees and charges: Another reason why the cheapest home loan may not always be the best option for you and your family is hidden extra costs. Will you be able to continue to afford your home loan if interest rates rise and you want to switch from variable interest rate to fixed? Perhaps you are planning to have a baby and may want to take a break from mortgage payments. Simple no-frills home loans can often not include these important features, or will charge you for them.

Whatever you decide, it’s best to thoroughly research your home loan options and weigh up the pros and cons of each before making this potentially lifelong financial commitment.