What your bank isn’t telling you
Banks and lenders are required to display a comparison rates when advertising any loan product.
This law was introduced to stop lenders from advertising false interest rates and display any hidden costs that wouldn’t normally be displayed.
So what does a comparison rate actually mean and does it really help you get a better deal?
Comparison rate calculator
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How does a comparison rate work?
A comparison rate is the true cost of a home loan, taking into account interest charges and other credit fees and costs.
The rate allows customers to identify the actual cost of getting a loan and how it can affect their financial situation.
The comparison rate is currently a government mandated requirement, which means all banks and lenders must display a comparison rate when advertising their product.
This requirement was placed to ensure that the cost of a home loan is displayed more accurately to the customers.
This also attempts to stop lenders from advertising cheap rates that ultimately lures borrows to get a loan that they may not be able to afford.
As its name suggests, the comparison rate can also help borrowers compare between the cost of different loans before they make their decision.
What does it include?
Generally, the comparison rate is calculated by adding the interest rate with any other costs and fees that may apply on the loan, represented by a single percentage figure.
The figure highlights the actual cost of a home loan.
When calculating the comparison rate, lenders take into account:
- Interest rate: This is the actual interest rate that lenders charge and can affect how much you will be able to borrow.
- Fees and charges: Lenders may charge additional fees such as a monthly account fee, establishment fee, valuation fee and settlement fee. These fees can have a significant effect the cost of the loan.
- Loan term: Lenders usually calculate your repayments using amortisation (paying off the debt over time) which takes into account the loan term and the interest rate. Note that the comparison rate is usually calculated for over 25 years, although standard home loans last for over 30 years.
- Loan amount: Some banks may offer a discounted rate on bigger loan sizes. This means that the comparison rate can be lower for bigger loan amounts.
- Payment frequency: Making frequent repayments can lower the outstanding balance on the loan on a more regular basis. This can reduce the overall comparison rate.
How are comparison rates calculated?
As a general rule, the comparison rate can be calculated by using a formula governed by the UCCC.
The calculation includes most of your home loan information, including:
- Loan amount.
- Loan term.
- Repayment frequency.
- Interest rate.
- Fees and charges, such as valuation fees and settlement fees.
However, the calculations don’t include:
- Government stamp duty.
- Break costs.
- Early repayment fees.
- Redraw fees.
- Other legal fees and charges.
Comparison rate warning
Comparison rates are based on a secured loan of $150,000 over a term of 25 years.
WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.
As per the National Consumer Credit Protection Regulations 2010 – RG 99.
Can comparison rates help me get a better deal?
Although comparison rates are a way to force lenders to present the true cost of a loan, these figures are often inaccurate and unreliable.
The reason is that lenders generally don’t include certain factors when calculating the comparison rate, such as government stamp duty and break costs.
This can cause misunderstandings amongst borrowers and may lead them to take out a loan that they cannot afford.
What do lenders leave out?
Generally, lenders take into account a number of factors when calculating a comparison rate. However, some important costs are often left out during this calculation. This can affect your borrowing power significantly.
Some of the things that they may not take into account include:
- Lenders Mortgage Insurance (LMI): LMI is a fee charged if you’re borrowing over 80% of the property value. The comparison rate doesn’t include LMI when calculating their comparison because the calculation is usually based on 80% LVR (Loan to Value Ratio) or less.
- Stamp duty and other government fees: Government fees and charges, such as stamp duty, aren’t included in a comparison rate. You can use our Stamp Duty Calculator to find out how much stamp duty you’ll need to pay.
- Conveyancing fees: You may need to hire a conveyancer or solicitor when applying for a home loan.
- Redraw fees: Some lenders may charge a redraw fee if you want to redraw during a fixed rate period.
- Break fees: This cost may apply when you terminate a fixed rate home loan before the fixed term ends.
Note that lenders normally calculate the comparison rate for a term of 25 years, while most loans last for 30 years. If you find this then you can have the lender rework the rate for a 30 year period.
Get professional advice from a legal advisor
It’s essential that you speak with your credit provider or lender to learn about the latest interest rates and discounts available.
If you need help finding a suitable lender that can help you meet your financial goals, then it’s recommended that you speak with a mortgage broker. Our mortgage brokers are experienced at getting tough home loan situations approved!
Speak with one of them on 1300 889 743 or fill in our free online assessment form to find out which lender is right for your situation.
Is there a better way to compare home loans?
A comparison rate can be a useful tool for borrowers to compare different home loan products.
However, while comparison rates may reflect the true costs of a loan, the figures may be completely different than depending on how much you’re looking to borrow and your loan term. Normally, the comparison rate may not reflect your situation because of this.
For instance, a $350,000 loan over 25 years may be advertised as variable interest rate 4.18% and the comparison rate may be 4.48%. However, this may not apply for a loan size of $550,000, or for a 30 year loan term.
Calculating the comparison rate can be quite difficult, which is why credit providers are required to provide a comparison rate when they advertise a rate or home loan. However, you can calculate this yourself using a formula governed by the Uniform Consumer Credit Code (UCCC).
Tips to compare home loans
The comparison rate isn’t the only factor that can help you figure out the cost of a home loan. To find the right home loan and compare the available options, you need to:
- Calculate an accurate cost of the loan: You need to consider all costs associated with the loan, including the interest, government fees and charges, discounts and waivers, and also LMI.
- Look at the cost over the preferred loan term: Most people don’t keep a loan for too long so a 25 year comparison rate won’t make sense to many.
- Analyse the factors that can affect your borrowing power: Comparing different home loans comes down to the loan type, flexibility, features and other factors associated with the loan. Properly analysing this information can help you to figure out if you can afford the loan.
- Identify your needs and objectives: It’s essential that you figure out if the loan meets your home loan goals. For example, you may want a smaller deposit or the certainty of fixed repayments.
You can use our How Much Can I Borrow Calculator to get an idea of how much you may be able to borrow on a home loan.
How is it different from interest rates?
Basically, the interest rate is the percentage of your loan that you’ll pay along with the original loan amount.
This is the percentage figure that most people take into account when comparing home loans.
On the other hand, the comparison rate is calculated by adding the interest rate that you’ll pay and any additional fees and charges that may apply to the loan. The main idea of this rate is to display any hidden fees, charges or costs so that the customers can make an informed decision.
Although the comparison rate can help you get a better idea of the actual cost of the loan, it’s usually inaccurate as most lenders don’t include special factors such as LMI, stamp duty, conveyancing fees and break costs.
It’s recommended that you speak with a professional credit provider before you decide to get a home loan instead of just relying on the comparison rates.
You can also speak with one of our expert brokers who can rework the comparison rate according to your situation. Call them on 1300 889 743 or complete our free online assessment form to get a better idea of comparison rates today.
Does every loan have a comparison rate?
No, loans that aren’t regulated by the National Consumer Credit Protection Act, or NCCP, don’t have comparison rates. These loans can include:
- No doc loans.
- Mortgages to buy shares, such as margin loans.
- Loans for business purposes.
