What is a comparison rate?
The comparison rate is an indicative interest rate. It combines the interest and known fees that you pay on a loan to give you a better picture of what the loan costs overall, helping borrowers make more accurate comparisons between products. It is designed to help home buyers identify the 'true cost' of a loan.
It is compulsory for lenders in Australia to display the comparison rate with the advertised interest rate on a loan product.
If you are buying your first home or your 2nd home, you must also consider other factors such as offset accounts, redraw facilities and how interest is calculated too.
How is a comparison rate calculated?
A comparison rate reflects the amounts and terms as specified in the regulations. It should also reflect the nature of the product. For example, the regulations specify examples for loans with terms of 25 and 30 years (which would describe a home loan) and terms between 2 and 7 years (which would reflect the terms of most personal loans).
Why comparison rates are important
Using comparison rates to compare home loans gives you a better understanding of how much a particular loan will cost you, because it includes both interest rate and known fees. For example:
Home loan 1: 5.00% interest rate, 5.10% comparison rate
Home loan 2: 4.80% interest rate, 5.20% comparison rate
If you only consider the home loan interest rate, home loan 2 appears to be the more competitive home loan. However, when comparing the comparison rates of the two loans, home loan 1 is the more competitive loan in terms of cost. This would indicate that there are more fees involved with Home loan 2.
What fees does the comparison rate cover?
Generally, these fees are at the start of the loan, ongoing throughout the loan and at the end.
- Establishment fee
- Valuation fee
- Monthly fees (such as account keeping fees)
- Annual fees
A lender may do fee waivers as part of a promotion or new business, but this may apply only to some one-off fees.
What fees does the comparison rate not cover?
The comparison rate does not cover fees which are not part of the loan package. These include, but are not limited to:
- Redraw fees
- Early termination fees
- Early repayment fees
- Late payments fees
- Government fees (stamp duty etc).
Comparing home loans
Consider your circumstances and contingencies (for in case your circumstances change) when looking at what loan is right for you. The Target Market Determinations (TMDs) can also assist you with the features of a loan product, to match to your needs.
Keep in mind how the type of loan may change over time: fixed rate loans will only fix your interest rate for a specific period of time. If your circumstances change, you may need to pay a fee to exit the fixed rate period ahead of its expected conclusion date. Variable rate loans can offer you more flexibility, but variable rates can both increase and decrease over time. The variable rate disclosed is only at a point in time, and may not remain the same for the duration of your loan.
When you have determined what type of loan best suits your needs, you can then compare the comparison rate for similar types of loans across lending institutions.
You can compare home loans below using our loan comparison calculator which will give you a home loan comparison rate for the particular loan you are considering.
Importance of comparison rates
The comparison rate is reflective of the interest rate, loan fees, loan term and loan amount. Loan amounts can vary the comparison rate significantly so be sure to use a loan calculator to discover the comparison rate for the loan you are considering.
It's important to also consider all the features and benefits of the loan - rather than only focusing on the comparison rate.
Benefits such as redraw, 100% offset and ability to make additional repayments / flexible repayment periods can make a difference to the attractiveness of a loan.
Always refer to the Target Market Determination and Product Facts Sheet to determine whether a product suits your needs or not. This article is general information only, and not personal advice.