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Comparison rate vs interest rate

What is a comparison rate? What does comparison rate mean? Find out the difference between a comparison rate and an interest rate

An interest rate of 3.99% or a comparison rate of 4.99% ? 

If the interest rate on your home loan is 3.99% and the comparison rate is 4.99%, how much will you pay in interest each year?

The comparison rate is the total effective interest rate you will pay.

So the answer is you’ll pay a total rate of 4.99% if the comparison rate is 4.99% and the interest rate is 3.99%

What is a home loan comparison rate?

When you see home loan offers advertised, they often state an interest rate and a comparison rate.

What’s an interest rate?

What’s a comparison rate?

Does it matter if you know what they mean?

Say you’re about to borrow $400,000.

Do you want to pay a high interest rate or a low rate?

Most people are clear they want to pay a lower interest rate. But when it comes to the comparison rate, most people aren’t so sure what they want.

Is it better to have a high comparison rate or a low comparison rate?

I ask people what the comparison rate means.

Guess what the most common response is? It’s this:

“The comparison rate is the common interest rate across the market, which the interest rate is being compared to.”

The above explanation is incorrect.

The comparison rate is the effective interest rate of the loan you’re looking at.

If you add up all the fees and charges payable for the loan you’re considering and add them to the interest rate, you get the comparison rate.

The comparison rate adds all the fees and charges to the interest rate to show you the full cost of the loan you’re considering.

As mortgage brokers, we can check the comparison rate of hundreds of loan products, not just the interest rate. This is one of the many ways we make sure any loan product suggested is appropriate for our client.

What does mortgage comparison rate mean?

Let’s use an example.

Lender ABC is advertising a home loan product called, “The First Home Buyer Special”.

The details are as follows:

Interest Type: Variable
Interest rate: 3.99%
Monthly admin fee: $10
Yearly package fee: $349
Application fee: $600

Let’s say you’re considering borrowing $150,000 from lender ABC. And you want the First Home Buyer Special loan.

How much will you actually be paying each year?

You’ll be paying more than the 3.99 interest rate, correct?

In year 1 you’ll pay the $600 application fee. You’ll pay 12 lots of the $10 monthly admin fee. You’ll likely pay the yearly package fee of $349 before the first 12 months are up. And of course you’ll be paying 3.99% of $150,000, less any payments you’ve made toward the principal.

So what is the comparison rate?

The comparison rate is the total amount of interest, fees & charges, expressed as a single rate.

Do lenders always have to say what the comparison rate is?

Yes.

Lenders have a legal obligation to state the comparison rate. The comparison rate must includes most fees and charges. The comparison rate must be stated when lenders advertise household financial products to Australian consumers.

The applicable rule comes from the National Consumer Credit Protection Act 2009 (NCCP). You can read more about it here.

Why do lenders keep referring to interest rate, not comparison rate?

You would have noticed home loans advertised often have a focus on the interest rate. While the ad will mention the comparison rate, it’s common for the focus to be on the interest rate.

It can be easy to presume the advertised interest rate is important. But it’s not. What’s important is the comparison rate.

Which bank has the best home loan interest rates?

Some better questions could include:

  • How can I check which banks have the lowest comparison rate home loan products?
  • How can I make sure the different home loan products I’m researching are relevant to me?
  • How can I filter the hundreds of home loan products according to my individual requirements and objectives?
  • How can I outsource all this work to someone who can help me find the right home loan product?
  • Can I get someone to do this research for me for free, who I can call whenever I want and will meet me in person to discuss it all?

As a mortgage broker, we have software to analyse loan products, across 35+ lenders. We have access to each lenders policies and their individual serviceability calculators.

We’re able to answer the above questions for you, and anything else you may be curious about.

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