When shopping around for a loan, chances are you had a look at the comparison rates given to you to help you decide between lenders. But do you know what exactly goes into creating these comparison rates? And how effective are they really at showing us which products offer the best value for money?
Comparison (indicative) rates aim to make it easier for you to compare loans by showing the ‘true cost’ of a loan. Lenders must advertise a comparison rate based on a loan of $150,000 over 25 years when they promote a home loan interest rate.
Comparison rates are different from the interest rate you are given for each home loan; to create a comparison rate, a lender will use the amount of the loan, the loan term, the repayment frequency, interest rate and any associated fees and charges and create a percentage figure.
All fees that are payable throughout the process of establishing the loan, during the loan term and at the conclusion of the loan are included in a comparison rate.
Although they are intended to make it easier for consumers to compare loans, this figure can actually make it a bit difficult to accurately calculate how each loan will compare in the long run, as most home loans are much higher than $150,000 (the average Australian mortgage is around $315,000) and have a longer term of around 30 years.
The main thing to watch out for with comparison rates is that although they tend to take things like associated fees and the repayment frequency into consideration, because they are usually based on a different loan amount and/or loan term than yours they may not represent accurately which loan presents the best value. Some loans even have a minimum loan size that is larger than the $150,000 used to calculate the comparison rate, which makes it quite irrelevant in those cases.
It is a good idea to still look at the features that each lender offers with their loans, as the rate is not the only thing that matters when choosing a loan that is suitable for you. Features such as flexible repayment options or redraw facilities can be very useful to some, and you wouldn’t want to overlook these just based on a low rate.
What the comparison rate does not include are fees are charges which may occur or are based on some future ‘event’, such as redraw, early termination fees, or progress payments. Also keep in mind that some comparison rates also do not include government fees and other specific charges that apply to certain situations or valuation/legal fees that may be more expensive in different locations.
A low comparison rate does not always mean it will suit you best; in some cases, a home loan with a higher rate but with no ongoing fees could actually be better if you have a smaller loan amount, and a lower rate with ongoing fees better for those with a higher loan size.
So while the comparison rate is a helpful tool for comparing the cost of different loans, it’s important to remember that it doesn’t provide the total picture and should only be treated as a rough guide.
Above all, it is important to note that just because one loan appears to have a lower comparison rate than the others, it does not necessarily mean that one is the best for you and your situation.
Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.
Will played a pivotal role in the successful establishment of iMortgage. His dedication and passion for the mortgage industry have won Will the utmost respect as an integral part of the iMortgage brand.
A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”
Will is a cricket and football tragic, who also enjoys running.