A home loan comparison rate is another piece of jargon that you may have not come across yet as a first-home buyer and it’s another important piece in the home ownership puzzle.
What is a home loan comparison rate?
Understanding what a comparison rate is could mean the difference between a good or a great home loan as it provides comprehensive information about the contents of your mortgage.
When a lender shows you its interest rate, it is always accompanied by a comparison rate, which includes the interest payment based on current interest rates and the fees and charges contained in the mortgage.
Home loan interest rate vs comparison rate
Unlike the interest rate, the comparison rate represents the real cost of the home loan as presented to you in fortnightly or monthly repayments.
Home loan lenders are legally required to display their comparison rate next to their interest rate in their advertisements, and there should never be a large discrepancy between the two if the fees are reasonable.
What information does a comparison rate contain?
Comparison rates include interest rate payments and the fees and charges associated with your mortgage, which could include:
- set-up or establishment fees.
- account-keeping fees.
- annual fees.
- other ongoing lender fees.
Comparison rates don’t contain:
- stamp duty.
- mortgage registration and any other government fees.
- any later fees and charges associated with the mortgage for options such as redraw or offset.
Comparison rates only ever include mandatory fees or the fees you’re absolutely required to pay. They never include government fees for things such as stamp duty, and they shouldn’t include optional extras on your mortgage that you haven’t taken advantage of yet, such as a redraw facility.
Seeing through the fine print
Comparison rates can accurately measure the pros and cons of respective mortgages because, put simply, they reveal exactly how much you have to pay and what you’re paying for. Before the advent of comparison rates, it was fairly standard practice for banks to offer deceptively low interest rates but exorbitant fees and charges, from the establishment fee to charges for early loan repayment and everything in-between.
With a fuller, three-dimensional picture of your loan’s composition, you can now compare lender products with far greater confidence. Interest rates may get all the media attention, but a comparison rate is every bit as important for a first-home buyer.
Loans with relatively low interest rates may have a higher comparison rate, and two vendors with identical interest rates may have different comparison rates due to higher ongoing account fees or even a higher establishment fee.
As is the case with interest rates, comparison rates should not deviate wildly between the major lenders, especially in a time of historically low interest rates where it’s much easier to spot a mismatch in the lender’s interest and comparison rates.
Having said that, there are plenty of lenders to explore by way of a comparison rate calculator. You can see the differences in terms of dollars saved if, for example, your ongoing monthly fees were $30 as opposed to $10 over a 20-year mortgage. It might only be $20 a month but over the course of 20 years it could be a sizeable difference.
Comparison rate calculators are pre-configured at a $150,000 loan over 25 years but as that will never provide an accurate rate for most people’s mortgages, they should be adjusted to your mortgage’s loan amount and its term, to better reflect a ‘true’ comparison rate.
Above all else, a comparison rate should reveal anything that’s murky or misunderstood in your mortgage arrangement and you can always ask your lender to disclose all of the components of its comparison rate.
Shop around for the rate that best suits your personal investment strategy. Remember that knowledge is power, and understanding the comparison rate means you can, at least, discuss with your lender potential reductions in fees and charges or a loan structure that better suits you.
Additionally, always talk to a home loan specialist or the lender if you’re unsure about what is contained in the comparison rate.
Mortgages and Home Loans in Australia
Home loans are not overly complicated, but having a rudimentary understanding of the fundamentals will give you a head start as you set out on the great Aussie home ownership journey.
How Much Do You Need for a House Deposit on a Home Loan?
A house deposit, or a home loan deposit, is your initial contribution to the total purchase price of a property — typically 5%-20%.
What Is Home Loan Pre-Approval?
When you are pre-approved for a home loan, it means a lender has checked your credit and has made you a loan offer. It is a promise, not a guarantee.
How Much Can I Borrow for a Home Loan?
Instead of focusing on how much the bank will let you borrow, you should focus on what you can actually afford.