I’m sure you’ve seen the term “comparison rate” floating around, but do you know what it actually means?
Why do comparison rates exist?
Comparison rates were introduced to ensure consistency in the way lenders represented the cost of a loan. It allows consumers to see the total cost of a home loan, without having to delve into the small print. Because all lenders use a standard formula, we can compare the true cost of a loan before making a decision on which loan to go with.
What goes in to calculating one?
The comparison rate is calculated by adding together the interest rate, plus specific fees and charges that may apply to the loan. For example establishment fees, approval fees, upfront or ongoing fees are included, but things like government charges and stamp duty are not included (as they can’t be accurately calculated for comparison purposes).
It’s important to remember that comparison rates are calculated using a formula made up of a loan amount (e.g., $400,000), loan term (e.g., 30 years) and payment frequency (e.g., fortnightly), which may not actually reflect your particular situation.
When should we pay attention to them?
It can be particularly useful to look at the comparison rate when faced with a temptingly low ‘honeymoon’ rate, because it considers the fact that the interest rate will revert to a higher amount at the end of the honeymoon period.
How do they affect my decision on which loan to go for?
Whilst the comparison rate is something to be aware of, it’s definitely not the main factor to consider when choosing a loan. What should affect your decision is the features and benefits of the loan product that make attractive, such as redraw ability, offset functions and flexibility.
Also important is the overall loan structure – would you benefit from having a split loan, multiple offset accounts, or a packaged lending solution? These are all things we can help you consider to ensure that the loan you select is the right one for your personal situation.
