You’re looking to buy a home and have noticed mortgages have two rates – the advertised and comparison rate. Here’s the difference between the two and how each rate applies to you.
What is a comparison rate?
By law, lenders must list both their advertised and comparison rates. The advertised rate is the rate the lender offers you when you apply for a loan. It’s also the rate that they use to attract your interest and is typically low, in order to entice you to find out more.
The comparison rate is the advertised rate plus any fees. Thus, the comparison rate gives you an accurate indication of what you’re actually paying for your loan.
For instance, in October 2018, the NAB Base Variable Rate Home Loan, a principal and interest home loan for owner-occupiers, had an advertised rate of 3.69% and a comparison rate of 3.73%. Therefore, the fees associated with this loan cost 0.04%.
How is a home loan comparison rate calculated?
While comparison rates give you an indication of the cost of your loan, these are not tailored specifically to you and your loan requirements. Instead, a comparison rate uses a base loan amount of $150,000, a loan term of 25-years and centres on principal and interest repayments.
Another consideration is the comparison rate includes ongoing account fees, and establishment and application charges. Rarely do comparison rates include property valuation charges or Lenders Mortgage Insurance costs.
Why were comparison rates introduced?
Lending authorities established comparison rates to prevent lenders from advertising exceptionally low rates and luring unsuspecting borrowers to take out a loan that was more expensive. By introducing this law, lenders must now disclose their fees, so borrowers can estimate which loan represents better value.
Let’s look at several examples of advertised and comparison rate home loans, so you can see how these rates work.
|The loan||Advertised rate||Fees & charges||Comparison rate|
While Mortgage A looks the most favourable at 3.49%, you’ll discover that this loan has the highest fees, making it one of the more expensive loans listed. However, when you take fees into consideration, the loan with the lowest rate is Mortgage D at 3.59% with a comparison rate of 3.74%.
How important are comparison rates when selecting a loan?
Comparison rates give you an indication of home loan costs and are an excellent way of comparing loans critically based just on rates. But, it’s vital you look at other factors when selecting the right home loan for you, including:
- Loan type: There are loans for different purposes – construction, owner-occupier, investor, bridging and renovation – these loans are several of the most common home loans on offer. So, before looking at rates you need to make sure that you’re looking at the right type of loan for you and your circumstances, as rates can vary depending on the loan type.
For example, owner-occupier loans are typically lower than investor loans. Therefore, if you look at owner-occupier loans when you’re buying an investment property, you’ll be wasting valuable time researching the wrong products.
- Interest rate type: Home loans can come in interest only, principal and interest, variable and fixed rates. Deciding which rate is right for you depends on your personal and financial circumstances.
For instance, fixing your home loan for five-years when you wish to sell in three-years could be costly. Fixed loans typically attract break fees that can cost thousands if you need to shorten the loan term due to circumstances, breaking the loan agreement.
- Features: Loan features can include an offset account and redraw facility, the choice to pay back your loan faster without penalty and no charges to switch from a variable to a fixed rate. These features allow you to save more over the term of your loan and can be a significant factor in the loan selection process.
- Fees: Home loan fees include establishment and application fees, ongoing account fees, property valuation charges, overdue payment charges, redraw fees and switching fees, as well as break costs. In some instances, these fees can add thousands to the cost of your home loan, so it’s imperative that you calculate costs before applying for a loan.
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Why is it important to compare loans?
Comparing home loans can save you thousands over the term of your loan. Plus, you can find the best features and get the best deal.
We all want to save more money, and comparing home loans before you put in an application can enable you to save a great deal by being aware of fees, interest rates and features. Then you can calculate which loan gives you the greatest amount of benefit. You may even decide on a strategic plan of attack so that you maximise any loan features and pay off your mortgage faster.
Researching the home loan market can take time and also effort, so if you don’t feel up to it or you find the mortgage information too confusing, then it may be time to enlist the help of a mortgage broker. Brokers ask you a series of questions about your personal and financial circumstances and, based on these needs, they’ll compare the market to find the right selection of loans that could be suitable for you.
Are you looking for a home loan, but you’re not sure where to start? eChoice’s expert brokers can help you understand the market and simplify the process of applying for a mortgage. We have access to hundreds of products, so we’ll find you a competitive rate.
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