What Does Comparison Rate Mean?
Every Bank and Lender has to show a comparison rate alongside the advertised rate by law, but not every borrower knows the difference between the two, or how to use them to their advantage when applying for a loan. Your home is likely to be the biggest financial asset you purchase, and differences in interest rates and other loan costs can mean spending thousands more than you may need. This article aims to shed light on comparison rates across various loan types, to give you a better understanding of how to find the best loan for you. What is meant by a comparison rate? We’ll start at the top. A comparison rate is a legal requirement that lenders must show against their own advertised credit rates. A comparison rate helps keep lenders honest about any large fees that are played down by a low-interest rate. It helps the consumer identify the true cost of a loan. While the interest rate (usually on the left) shows the interest you would pay on that specific loan product, the comparison rate indicates the percentage you would pay when you factor in other costs associated with servicing the loan over the long-term included in the loan repayments. Many simply use the interest rates to compare loans and lenders, but it’s not always the lowest interest rate that gives you the lowest repayments. For instance: Example loan A totals 4.5% comparison rate, and example loan B has a 4.35% comparison rate. Though Loan A may seem the better option from the interest rate, it’s Loan B that will cost you the least overall. [*Example rate not indicative of any Mortgage House loan rate] What is used to calculate a comparison rate? There are many variables used to determine a comparison rate, including: Interest rate (this is the bulk of the percentage) Fees and charges (any fees charged from start to finish of your loan) Repayment frequency Loan term Loan amount With that in mind, the other elements include fees and charges of the loan, which depends on your loan features and lender, may encompass the following: Upfront loan setup fees like application, valuation, processing fees, title insurance and lender legal fees Ongoing fees like monthly or annual account charges Exit costs like legal and discharge fees Added together, they provide a truer cost of the loan on offer. You can then compare loans using both percentages, showing you which will cost you more altogether, or which has higher fees outside the interest rate. We’ll explain more of how to use these to your advantage later in the article. There are various factors which would change a comparison rate, and each of these will change depending on the loan type, the features it includes, and the lender itself. When you think of the interest rate as the base amount, then the difference between the interest and the comparison rate, after loan term and amount, is the percentage cost of ascertainable charges and fees. Comparison rates cannot predict what may happen throughout your loan, therefore they do not include such things as redraw fees or early termination fees. Government and statutory charges also do not impact on the comparison rate as these are standard regardless of lender. The following fees aren’t included in the comparison rate: Stamp duty, registration fees, and other government charges Conveyancing fees Late payment fees Break costs Deferred establishment fees Redraw fees Are comparison rates based on certain loan amounts and terms? Comparison rates are all calculated on a certain figure, and usually with home loans, this is not indicative of the loan you will need to take out. A home loan comparison rate in Australia is usually calculated based on a $150,000 loan and a loan term of 25 years. As previously mentioned, a comparison rate must be taken as a guide to give you an idea of the true costs of maintaining your loan. Remember that when you look at comparison rates, the loan amounts and terms don’t cover all possible situations like incidental fees your lender may charge for making redraws, extra repayments or switching to a fixed rate from a variable, for example – so they may not be an accurate reflection of your particular loan. The amounts that a comparison rate is based on will be in the fine print. While comparison rates can be a good starting point, it’s also important to compare the other features of the loan to see if it works for you. What’s the difference between the interest rate and comparison rate? Interest rates tell you the percentage of interest you will pay as a result of taking out your loan. This will determine your monthly repayments, and rates fluctuate between each loan and lender, though all in Australia are generally based upon the movements of the RBA (the Reserve Bank Cash Rate). Comparison rates, as explained above, take the interest rate on offer with that loan, and add to it the additional payments you will be required to pay throughout the life of the loan, equating in a percentage that is more akin to what you will pay in total costs on top of your loan. Though they are more accurate to what you must pay back than interest rates alone, they should still only be used as a high-level indicator, as they cannot take every possible situation into account. To best utilise these rates, you should look for minimal gaps and differences between the advertised rate and the comparison rate. How to use comparison rates to get the best loan The more you know about the loan process and industry, the more educated your decision will be. This will usually mean you get a better deal than someone who picks and chooses their loan based only on the interest rate. Knowing the costs involved and choosing your loan based on this information can save you thousands over the course of your loan. Hidden costs and fees aren’t ever a good
What’s the Difference Between “Interest Rate” and “Comparison Rate”?
Its not surprising that many people venturing into the property market are still confused understanding the difference between interest rates and comparison rates? Or are they one and the same thing as they always appear side by side? We clear up the confusion. What is a comparison rate? A home loan comparison rate is a percentage figure that represents the total cost of the loan per year after taking into account all loan costs. All lenders by law must display the comparison rate next to their advertised interest rates just like Mortgage House does. A home loan comparison rate is usually worked out using the example loan amount of $150,000 over 25 years. The comparison rate includes the interest rate on the loan, required repayments, most upfront fees such as application fee or establishment fee, and ongoing fees and charges. This way borrowers can make a real comparison when considering how much different loans will cost them. The comparison rate should be used as a guide only and use it to compare apples with apples, that is, home loan products with similar features. Its also important to further check with your shortlisted lender as the comparison rate does not calculate every possible cost involved with taking a loan especially if the charge may not apply to all borrowers, such as break fees for fixed rate loans or redraw fees. Whats the home loan interest rate? A home loan interest rate only reflects how much interest you will be charged per year on the balance of your loan, which determines your monthly repayments. The difference between a home loan interest rate and the comparison rate: In summary, the home loan comparison rate compares the overall cost per year of the loan and includes the interest rate as well as the various fees and charges that may crop up over the life of your loan. On the Mortgage House website we list the comparison rate right alongside the advertised interest rate for each home loan. Mortgage House At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one. But don’t worry, we can help with that. If you’re thinking of buying a home, you can contact us for advice about the best options for you when it comes to your mortgage. Click here to speak to us!