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The comparison rate on a home loan takes into account the interest rate and the cost of fees. Lenders display an example comparison rate for every home loan, but it's not particularly accurate. Using a comparison rate calculator can help you figure out your own comparison rate.
The comparison rate takes into account the interest rate and a range of fees and charges that apply to a loan, and is represented as a percentage figure. It was introduced as a way to stop lenders advertising a great low interest rate for their loan and then slugging borrowers with a whole bunch of hidden fees.
How can I compare home loans using the comparison rate?
Shopping around for home loans can be a daunting process with various numbers, percentages and technical terms thrown around to confuse borrowers.
In the past, unscrupulous lenders would lure in borrowers with an interest rate that was too good to be true, and the borrower wouldn’t realise that there was a range of fees and charges attached to the loan.
The end result was people having to manage unexpected application, establishment and ongoing loan fees, meaning they were taking out loans that were much more expensive than they thought. In an effort to put a stop to this, the Australian government introduced the comparison rate as a mandatory requirement to show the true cost of a mortgage.
Lenders must show the comparison rate whenever they advertise a home loan, so look past the interest rate to see this all-important figure. You’ll then be able to see how the comparison rates of different home loans stack up against one another, giving you a better idea as to which loan is the most affordable.
However, the comparison rate is not without faults. A comparison rate can only use a certain number of examples, and in the case of home loans this is usually a $150,000 loan taken out over a 25-year loan term (rather than the industry-standard 30 years). This means for any loans larger than this, the comparison rate provided by lenders won’t be as helpful, it at all.
This is why it’s so important to use a personalised comparison rate calculator.
How to use the personalised comparison rate calculator
Finder's personalised comparison rate calculator is easy and intuitive to use. While the actual formula used to work out a comparison rate is quite complex, the calculator makes it simple for you to see how a number of loans compare to one another; all you’ll have to do is key in a few important details.
You’ll need to provide:
Loan term
Loan amount
The fixed interest rate and fixed period (if you’re opting for a fixed rate loan)
The ongoing rate
Upfront fees
Ongoing monthly or annual fees
Loan discharge fee
Once you’ve entered all the relevant details simply click ‘Calculate’ to be presented with the comparison rate for your loan. You’ll also be presented with your regular repayment amounts, a figure that represents the total amount of repayments you will need to make towards your loan, and a handy graph that demonstrates how long it will take you to pay off the interest and the principal amount on your mortgage.
Our personalised comparison rate calculator is a useful tool for borrowers and can help you get a clear picture of how much your loan will cost you on an ongoing basis and over its entire term. If you’re looking to compare a range of loans, the calculator can help you cut through the advertising campaigns and promotional offers to discover how much a loan is really worth.
Of course, you should also keep in mind that certain fees - including redraw fees, stamp duty costs and early termination or break fees - are not included in a comparison rate. In addition, you should consider other factors when choosing a home loan, including things like flexible repayment options, redraw facilities, linked financial products, the reputability of a lender and more when choosing a home loan.
Marc Terrano is a lead publisher and growth marketer at Finder. He has previously worked at Finder as a publisher for frequent flyer points and home loans, and as a writer, podcast host and content marketer. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help everyone get value for money.
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