Find out the true cost of any home loan product
We all know how important interest rates is when it comes to home loans, but there is another rate borrower should look at before choosing a home loan. This is called the comparison rate.
What is a comparison rate?
A comparison rate takes into account all the cost associated with the home loan taking into account interest rate, ongoing fees and charges. This is expressed as a single percentage which is used to compare other home loan products across different lenders.
Lenders will take the following into consideration when advertising their comparison rate
- Current Interest Rate
- All ongoing fees
- Term loan: 25 years
- Loan Size: $150,000
- Repayment Type: Principal and interest
Why do we need a comparison rate if there is already an interest rate?
When reviewing your loan, most borrowers would look at the interest rate without understanding the features and the overall cost of the loan product. This means some lenders would advertise a rate to borrowers that may look attractive at first but may not be suitable to their personal situation after considering the range of fees and charges attached to the loan.
To curb this, the Australian government introduced the comparison rate as a mandatory requirement to show the true cost of your home loan based on a set of assumptions so borrowers don’t need to work out how much it cost them if they decide to hold on to the loan for the long term.
Is comparison rate the holy grail?
The comparison rate can be misleading because a comparison rate is based on a set of assumptions as discussed above. This means for any loans larger than this or if borrowers review and refinance their loan then comparison rate provided by lenders won’t be as helpful, if at all.
How to use the comparison rate calculator?
Our comparison rate calculator is easy to use. All you’ll have to do is key in a few important details.
- Loan amount
The loan amount refers to the amount of money you have borrowed or the outstanding loan balance
- Loan Terms
This is referring to the amount of time you have to repay the loan with usual loan term ranging from 25 to 30 years
- Introductory rate
Introductory rate is special rates offered by lenders for a set period of time at the start of your loan. The introductory rate can either be fixed or variable. Upon the expiration of the introductory rate, it will revert to the lenders standard interest rate that is usually higher than the introductory interest rate
- Introductory term
This refers to how long you will be on introductory rate before it reverts to the lender’s normal interest rate
- Standard or Revert Rate
Reverted rate is your new interest rate once your introductory term expires. This is usually higher than your introductory rate
- Upfront Fee
Upfront fees are any fees that you have to pay when you apply for the loan which includes application fees or establishment fees
- Ongoing fees
Ongoing fees are fees that you will have to pay throughout the life of your loan. These can be annual fees, service fees (monthly), or account-keeping fees.
Although the comparison rate calculator is a simple tool for borrowers to compare the cost of the home loan product for the life of the loan, you should always keep in mind of certain fees such as redraw fees, stamp duty costs and break cost fee. This may not be included in a comparison rate.
When searching for the right product, looking at the interest rate alone can be misleading, you should speak to a mortgage specialist that understands what you need so they can work out which home loan is right for you.