How a home loan comparison rate helps you judge the true value of your mortgage.
A comparison rate is a rate that all lenders by law must display next to their advertised interest rates. You'll notice them in the table below:
It's a rate which takes into account some of the fees and charges of a home loan to give you a more accurate representation of a loan's interest rate once the costs are taken into account.
A home loan comparison rate is usually worked out using the example loan of $150,000 over 25 years. Personal loan comparison rates usually have an example loan of $30,000 over 5 years.
Comparison rates were made mandatory in an attempt to stop lenders from advertising incredibly low interest rates that lured unsuspecting borrowers into loans that actually cost them far more than they expected.
Why is it important to compare home loans?
- Get the best deal. Your home very well could be the biggest financial asset you will ever own, making the comparison process all the more important. You will save thousands of dollars in the long term if you find the best deal for financial situation.
- Save money. Hastily deciding on a home loan offering from a lender can cost you thousands of extra dollars in interest and fee payments over the course of your loan. If you compare thoroughly, you can find a loan that has a favourable interest rate and a low fee structure.
- Get better features. Besides finding the lowest cost of a loan, the most important reason to compare is to find a loan that comes with many great features. These can be things such as offset accounts, portability, redraw facilities, flexible repayment structures and more. Some of the features that you should be comparing will be discussed in more depth in the 'what to compare' section below.
- Avoid choosing the wrong loan. Choosing the wrong loan can be the biggest financial mistake that anyone can make. Home loans are secured against the property that is being bought with the loan. If you find yourself completely defaulting on a loan you can lose your property.
How to compare home loans
- Use a key facts sheet. Key fact sheets are informational documents that can be obtained from a credit provider, or be had if you look for it on the loan product page of most lenders. Lenders have to provide a fact sheet to customers due to Australian lending laws. Key fact sheets make it simpler to shop around for loans and compare the various options out there. Fact sheets will point out important information about loans, such as the total amount to be paid back over the life of the loan.
- Use a comparison service. Using a comparison service such as finder.com.au is a great way to get a good view of the home lending options that are out there. We provide handy charts and product pages on many of the home loan lenders in Australia. You can even securely go from our site to the website of a lender to begin the application process should you find a loan that interests you.
- Call the lender. You can contact a lender via phone to discuss the details of any loans they offer. This is a surefire way to get accurate information about the various loans in the lender's portfolio.
What to compare
In reality, the features you compare when you put two or more loans against each other will depend on what you want most out of your loan. Below we've included some ways you could compare home loans.
- Rates.The interest rate is one of the most important things to compare when looking at a home loan. How do the interest rates from various lenders stack up against one another? Is the interest structure on a loan fixed, variable or able to be split? Are there options such as offset accounts to lower the interest rate owed on a specific home loan? These are a few of the questions you should be asking when comparing the interest rates of various loans.
- Comparing the pros and cons of fixed and variable rate loans is important. Variable rate loans are more flexible, but they track the official cash rate. This means that when national interest rates rise, the rate you are paying on your home loan most likely will rise too. Fixed rate loans have interest rates that can be locked in for a period of 1 to 5 years in general. These loans are usually more popular with first time buyers who want more stability in their repayment process.
- Fees. The fee structure of a loan should be one of the deciding factors for you. Annual and monthly account-keeping fees are the most obvious ones to look at when choosing a loan. Establishment fees can vary greatly between lenders and you do not want to be paying too much upfront on an already expensive loan. Make sure that you look at those as well as the normal account-keeping fees. Finally, many of the extra features included in a loan, such as redraw facilities, may have fees attached to them.
- Features. The feature set of a loan can be a make or break factor in the decision process.
Offset accounts are commonly included with loans. An offset account is linked to your home loan, with any money in the account reducing the amount of interest you need to pay on the loan. An offset account with $20,000 in it on a $300,000 loan means you'll only pay interest on $280,000.
Extra repayments are an important feature to consider when comparing loans. If a loan package comes with the ability for you to make extra repayments, you will find that you can pay off the loan quicker, saving you money on interest.
Redraw facilities are another feature to compare. These allow you get access to any extra repayments you make in the event that an unforeseen expense crops up, or if you want to get access to your extra funds for a holiday, home improvement or anything else.
Salary repayments give you the ability to have repayments taken directly out of your paycheque. This can be done automatically, giving you the peace of mind that your repayments are being made in a timely fashion.
Tips when comparing home loans
To carry out a more effective comparison of home loans follow the points below.
Research credible sources when looking up the details on loans. Make sure that all of the information you are looking at is correct. You can double-check any information you compare with the lenders themselves.
Look at the comparison rate. Australian law requires lenders to provide comparison rates when comparing home loans. These are calculated to include fees and charges to give you a good idea of how this might affect the interest rate. They are usually based on a loan term of $150,000 taken out over 25 years.
Make a budget to see how much you can repay. Planning out a full budget of your current financial status will allow you to set parameters on the type of loan you can afford.
Balance both rates and features. A loan with a higher interest rate is not always worse than one with a lower rate. If a loan has a slightly higher interest rate but comes with a great feature such as a 100% offset account, it may be a financially sound option for you.
What's the difference between the interest rate and comparison rate?
The interest rate is the percentage amount most people take notice of when they try to compare home loans. This is the percentage of your loan that you'll end up paying in addition to the original loan amount. The comparison rate is a percentage amount calculated by adding together the interest rate, plus any additional fees and charges that may apply to the loan. The total figure is then converted into a percentage rate to highlight the true cost of the loan. Lenders are unable to hide any fees, charges or other costs, as these are reflected in the overall comparison rate. If you aim at comparing home loans from different lenders by focusing only on the interest rate, you may end up paying far more than you think. However, if you base your research on the comparison rate, you'll get a more accurate idea of the true cost of the loan. This will also help you find a far more competitive deal. The actual interest rate charged by the bank for your home loan is a major factor in calculating the comparison rate. Many lenders charge a monthly account fee for their mortgage accounts. Some might charge an annual package fee. Some may also charge an establishment fee, valuation fee, mortgage documentation fee and settlement fee. These charges need to be taken into account when calculating the comparison rate, as they do affect the overall cost of the loan. The actual term the loan is extended for will play a part in determining the comparison rate. Your repayments are calculated using amortisation, which takes into account how long the loan term is and what the interest rate is. When working out repayments, a longer loan term can mean lower monthly repayments. However, a longer loan term also means more opportunity for the bank to earn more interest. When it comes to calculating comparison rates, a longer loan term will mean a higher comparison rate. If you see a comparison rate calculated over 25 years, ask to have it reworked to reflect a 30 year term, if this is how long you intend your mortgage to be set for. The actual loan amount will also be a factor in calculating the comparison rate. Some banks actually offer discounted interest rates on larger loan amounts, so the comparison amount may actually be lower for a bigger loan amount. The interest on your mortgage is calculated on the outstanding balance every day. This means paying your repayments more frequently will actually reduce the balance on a more regular basis, which can reduce the overall comparison rate.
How do lenders calculate the comparison rate? The comparison rate is calculated using a formula that takes into account a number of items. These include:
Fees and Charges
The actual interest rate charged by the bank for your home loan is a major factor in calculating the comparison rate.
Many lenders charge a monthly account fee for their mortgage accounts. Some might charge an annual package fee. Some may also charge an establishment fee, valuation fee, mortgage documentation fee and settlement fee. These charges need to be taken into account when calculating the comparison rate, as they do affect the overall cost of the loan.
The actual term the loan is extended for will play a part in determining the comparison rate. Your repayments are calculated using amortisation, which takes into account how long the loan term is and what the interest rate is. When working out repayments, a longer loan term can mean lower monthly repayments. However, a longer loan term also means more opportunity for the bank to earn more interest. When it comes to calculating comparison rates, a longer loan term will mean a higher comparison rate. If you see a comparison rate calculated over 25 years, ask to have it reworked to reflect a 30 year term, if this is how long you intend your mortgage to be set for.
The actual loan amount will also be a factor in calculating the comparison rate. Some banks actually offer discounted interest rates on larger loan amounts, so the comparison amount may actually be lower for a bigger loan amount.
The interest on your mortgage is calculated on the outstanding balance every day. This means paying your repayments more frequently will actually reduce the balance on a more regular basis, which can reduce the overall comparison rate.
What isn't included in the comparison rate?
Multiple factors are taken into consideration in an effort to reveal the true cost of a loan and arrive at a comparison rate. Unfortunately, there are some costs that won't be included in the calculations, even though they are costs that can affect how much your mortgage costs overall. These include:
- Government stamp duty
- Conveyancing fees
- Late payment fees
- Break costs or early termination fees
- Deferred establishment fees
- Redraw fees
How important is the comparison rate?
Using the comparison rate as your basis for comparing various home loans from different lenders is a great start. It can show you the total cost of your home loan at a glance, without having to delve too deeply into the fine print to uncover any hidden fees or charges a bank might charge on top of the interest rate. However, this shouldn't be the only thing you consider when comparing your options. You also need to take into account the flexibility of the home loan type, along with any additional features of the loan that may suit your personal financial situation better. This might include linking an offset account to your mortgage or having access to a redraw facility, or the ability to make extra repayments without penalty. You also want to compare rates accurately if you've chosen a fixed rate or a variable rate. This is because your loan will be locked into a fixed rate for a specified period of time, but will revert to whatever the variable rate is once this expires. When you're doing your research, be sure you are comparing the same loan types that include the same features. Then check the comparison rates for each of these to be sure you're really comparing apples with apples.
Where will you find comparison rates?
Since 1 July 2003, banks and lenders are required by law to display the comparison rates wherever any advertisement for fixed term credit is shown. This includes home loans, personal loans and even credit cards. Essentially, any type of loan that can be used for personal purposes will have a comparison rate shown along with the interest rate charged for that loan.
Get an idea of current comparison rates below
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How do you calculate the comparison rate?
If the comparison rate you're given isn't reflective of your loan amount or your preferred loan term, it is possible to calculate this yourself. The comparison rates are actually calculated using a formula that is governed by the Uniform Consumer Credit Code (UCCC). The calculation is not simple, so you may find that using a good comparison rate calculator will make this easier for you. You simply plug in your home loan information and the calculator will create a comparison rate for you that is indicative of the true loan cost. Before you begin, you will need the following information:
- Loan amount
- Loan term
- Repayment frequency
- Interest rate
- Monthly account fee (if any)
- Annual fee (if any)
- Establishment fee (if any)
- Valuation fee (if any)
- Mortgage documentation fee (if any)
- Settlement fee
When you have all this information, you're able to enter it all into a good comparison rate calculator and reach a percentage rate that more accurately displays the real cost of a home loan.
Examples of Comparison Rates
Hypothetical case Study 1
In this example, we'll consider a lender advertising a rate of 5.7% for a home loan. Beneath this advertised figure in small print is the comparison rate 7.01%. In order to reach this comparison rate figure, it's important to factor in the fact that the 5.7% interest rate is only offered as an introductory variable rate that only lasts for the first 12 months of the loan. After this time, the interest rate reverts to the standard variable rate for the remainder of the loan term. For the purpose of this example, the standard variable rate is 7.15%. This lender also charges a $500 establishment fee, along with a $185 valuation fee, a $100 settlement fee and a $250 security discharge fee. When all of these fees, charges, interest rates and loan terms are combined, a borrower can then use the 7.01% comparison rate to determine the real cost of the loan. The advertised interest rate of 5.7% actually turns out to be far more expensive than it appears.
Hypothetical case Study 2
In this example, we'll look at a 5 year fixed rate home loan that is locked in at 7.19%. The comparison rate displayed next to this is 7.12%, which is actually lower than the advertised interest rate. This most frequently occurs when the fixed interest rate is higher than the variable rate. Once the fixed term expires, the interest rate reverts to the standard variable rate. In this instance, the variable rate is 6.97%. By the time you include the $500 establishment fee, as well as the $185 valuation fee, a $100 settlement fee and a $250 security discharge fee, the total comparison rate comes out to 7.12%.
When you're researching and comparing home loans in order to find the best deal for you, the comparison rate can be a great help in figuring out the true cost of the loan. However it shouldn't be the only factor you consider. It's also important to make your home loan comparisons accurately according to loan type, flexibility, features and inclusions. This will help you narrow down the right loan types to suit your individual financial needs. From there, you're able to compare similar loan types more accurately. Here are some tips for finding the right home loan and comparing the options available:
1. Product Features
Always consider what type of home loan you want before you start looking at interest rates. Look at the inclusions and features of each loan and decide what you really want. You may choose to link a 100% offset account to your mortgage, or you may want the ability to redraw any additional funds you have available. You may also want the potential to take a repayment holiday at some point in the future. The features included in your loan should be a primary focus before you start comparing interest rates.
If you know you intend to make extra repayments off your mortgage, you can to narrow down home loan options that will allow you to do this. For example: some basic home loans limit repayment options to monthly repayments only in return for a super-cheap interest rate. If you want to pay fortnightly and you want to increase the payment amount you make, you might need to choose a different home loan. Some fixed rate home loans also don't offer a lot of flexibility in terms of making extra repayments. There are lenders that will impose penalties for paying too much extra during a fixed rate term.
3. Split Loan Facility
Many borrowers like the option of being able to split their loan between a variable portion and a fixed rate portion. This allows them the security of locking in some of their home loan at a fixed rate, while still taking advantage of the added flexibility of a variable rate loan.
4. Offset Account
If you're searching for cheap interest rates alone, you may lose the option of linking a 100% offset account to your mortgage. If you're the type of borrower who tends to leave money in savings, you might be able to benefit from offsetting the interest you pay on your mortgage this way. Many basic home loans won't allow you to link an offset account.
5. Packaged Banking Products
You may want to streamline your banking so that your mortgage is linked to your savings account, your transaction account and your credit card. In some cases, the savings and transaction accounts can be merged into a convenient offset account. Packaging up your banking needs this way may make you eligible for certain discounts off your interest rate with some lenders that offer professional package home loans. Once you've taken all these things into consideration, you can then narrow down your home loan options. Choose a few lenders with very similar products that include the features you want and then view the comparison rates for each of them. This will give you a clear idea of the cost of the exact type of loan you want that will suit your financial needs more accurately.