If you are currently thinking about getting a home loan in Australia, you might be asking yourself questions like ‘what is a home loan comparison rate’ or ‘how is the comparison rate calculated’.
A comparison rate is an interest rate that always accompanies a lender’s advertised interest rate when you are taking out a home loan.
In this article, we will try to give you the answers and explain how it can help you figure out the true cost of a loan.
What is a home loan comparison rate, and what does it include?
A home loan comparison rate includes the interest rate and certain home loan fees and charges you have to pay, such as application fees. Lenders are required by law to display it next to any advertised interest rate.
No matter if you are a first-time home buyer or have experience with refinancing and own multiple investment properties, it is important that you understand home loan comparison rates. When deciding on a home loan, it’s important to always compare different financial options.
A home loan or comparison rate can help you identify the true cost of a home loan and compare home loans and services offered by different financial institutions and mortgage providers.
A home loan comparison rate will show you the true cost of a loan by taking into account:
The advertised interest rate per-annum (p.a.) for all types of loans, including fixed-rate and variable-rate loans, as well as repayment type (e.g., principal and interest or only interest).
The standard variable rate. If you have a fixed-rate home loan, the comparison rate will also consider the rate your loan reverts to at the end of the fixed-rate period.
Upfront fees. These can include home loan application fees, pre-approval fees, establishment fees, valuation fees (the cost for assessing your home’s value), documentation fees and settlement fees.
Ongoing fees: Fees that are charged on a regular basis, such as monthly account fees, annual fees and package fees.
Repayment options: The options available for repayment frequency and loan term can affect the value of a home loan.
A comparison rate doesn’t include things like fee waivers, mortgage offset accounts, or government charges like stamp duty.
Read more: How much is stamp duty in Victoria?
Comparison rate vs interest rate
The interest rate is the fee you pay each year on your borrowed amount that does not include the cost of the loan, while the comparison rate takes into account the interest rate and all the other costs associated with the loan.
How to calculate the comparison rate?
A home loan or mortgage comparison rate is calculated by adding any extra fees and charges to the existing interest rate. It is always higher than the market interest rate, but that is due to the additional costs that are taken into consideration.
The comparison rate can be calculated by including the interest rate and some of the following types of fees and charges:
- Application fee
- Pre Approval fee
- Valuation fee
- Documentation preparation fee
- Legal fee
- Settlement fee
- Monthly account fee
- Annual package fee
- Periodical admin fee
Discharge fees for when the loan is finished
- Discharge admin fee
- Documentation preparation fee
- Settlement fee
Where do you find the comparison rate?
As lenders are legally required to display a comparison rate when advertising a home loan, you can find it right next to an advertised home loan interest rate offered by a lender. Home loan advertisements must also include a comparison rate accuracy warning.
For example, you might come across a home loan advertisement like this:
A variable interest rate of 3.29%, a comparison rate of 3.70%, based on a loan of $150,000 over 25 years.
Comparison rate – the difference in home loan costs
A comparison rate can display a significant difference in costs when comparing two home loans advertised at the same interest rate; if you only take the interest rate into consideration, you might believe two loans can cost the same. The comparison rate helps to reveal whether one loan can cost more than the other.
For example, two standard variable home loans on the market could have an interest rate of 3.85%; however, due to the numerous ongoing charges, one of them might have a comparison rate of 4.17% and the other 3.87%. This is a significant difference and could end up costing you a lot more over the lifespan of your home loan.
If you want to get a home loan in Australia, we hope our article has helped you understand what a home loan comparison rate is, and why you should pay attention to it. When getting a home loan, remember to always check its comparison rate. This is essential if you wish to know all home costs upfront and avoid unforeseen and additional payments.
1. Why is the comparison rate so much higher?
The main reason why the comparison rate can be a lot higher than the rate the lender advertises is that apart from the interest rate, the loan also contains application fees or annual fees.
2. What is a home loan comparison rate and what does it mean in a home loan?
A home loan comparison rate is calculated by including certain charges and fees with the interest rate of a loan. It helps you figure out which home loan is right for you and gives you insight into the true cost of the loan in comparison to its advertised interest rate.