A comparison rate for a home loan is a number expressed as a percentage that helps you to understand the full cost of your credit per year. The comparison rate that's included for each credit comprises more than just interest fees. You'll also be able to see things like the required payments you'll make each month, and the ongoing fees you may need to pay.
In simple terms, a home loan comparison rate shows you the true cost of your loan. Sometimes referred to as an Annual Percentage Rate, or APR, it can also make it easier to compare your loan options against other offerings in the marketplace.
What's Included in a Comparison Rate?
The comparison rate on your home loan will take various expenses into account. Under the regulations of the National Consumer Credit Protection, comparison rates usually calculate the following:
- A loan term of 25 years
- Your repayment frequency
- Interest rates
- Monthly account fee
- Annual fee
- Valuation fees
- Mortgage documentation fees
- Settlement fees
Since 2003, the lenders in Australia have been required by law to show their borrowers the comparison rate available for their products. The aim is to ensure that you can make the most accurate comparisons when considering different loans, and potentially get a better deal as a result. Additionally, forcing lenders to show their comparison rates also means that these lenders are held accountable for unreasonably high charges.
How to Use Comparison Fees
When you're looking for the ideal offer for your home loan, a comparison rate can be used as a guide when you're searching for like-for-like products. The average house price in Australia can vary, and most comparison rates are given according to what you might pay for a loan of $150,000. Additionally, most home loans can last for longer than 25 years, which means that your comparison rate might not help much if you're looking for a term of 35 years.
The comparison rate that a lender gives you might not calculate every possible cost in your loan if the charge doesn't apply to every borrower. For instance, you won't see the costs associated with things like fixed-rate loans and break fees, or late payment fees.
Additionally, your comparison rate will not include any external charges that vary between different locations in Australia - such as government stamp duty.
Why is a Comparison Rate Important?
While a comparison rate doesn't give you all the information you could need for your home loan, it does mean you'll be more informed when looking for a deal. A comparison rate gives you a great number to work with when you're checking what's available in the market. Just make sure that you look at other things too.
For instance, consider the kind of features that each loan can offer, and how vital those deals are to you. For example, you might want a home loan that comes with an offset account linked to it or a redraw facility. These features might be more important to you than paying slightly less on your interest rate.