What is a mortgage comparison rate – and more importantly, how can it help you get a better deal on your home loan?
Lenders are obliged by law to include a comparison rate when advertising a loan interest rate, but in the mortgage marketplace, comparison rates are often misunderstood amongst borrowers.
Essentially, a comparison rate is a tool to help consumers identify the true cost of a loan, says finance broker Katie Toole from www.moneytoday.net.au.
“It is a rate that includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure,” she explains.
“Most people just use the loan interest rate to compare different loans. Although this is a good start, it doesn’t take into account other costs such as establishment fees, approval fees, any upfront or ongoing fees that comprise the overall cost of a loan.”
A comparison rate is made up of the following:
- the amount of the loan;
- the term of the loan;
- the repayment frequency;
- the interest rate; and
- the fees and charges connected with the loan.
According to Toole, a comparison rate is a useful tool for borrowers to compare the cost of different loans, but she clarifies that it is important to consider all of a loan’s features, and not just focus on the comparison rate.
“The loan amounts and terms shown on a comparison rate schedule don’t represent all of the possible combinations of amounts and terms,” she says.
“This means the amount and term of your particular loan may not be included in the comparison rate schedule.
For example, you may see a loan advertised as: Variable interest rate 6.95%, comparison rate 7.28% - based on loan of $150,000 over 25 years. While this comparison rate reflects the true cost of this example loan, it would be a completely different figure for a loan size of $400,000, or for a loan term of 30 years.
In order to get an idea of the comparison rate that applies to your loan, Toole suggests you look at the comparison rate for the amount and term closest to the amount and term of your loan. If in doubt, don’t be afraid to ask your lender or mortgage broker
to help you calculate the comparison rate of a loan that suits your situation.