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Comparison Rates

Comparison Rates

Do comparison rates really help you work out the true cost of your loan?

What is a comparison rate

A comparison rate is a rate that help you work out the cost of a loan. It combines the interest rate plus most fees and charges relating to a loan into a single percentage figure. The intention of the comparison rate is to help the borrower compare loans from different banks and find out how much it will cost you.

What do I need to know relating to comparison rates?

The comparison rate is usually calculated based on a particular loan scenario. This is usually based on a $150,000 home loan over a 25 term. This means the comparison rate is only true for this particular example given and it may not include all fees and charges.
The loan term, fees and charges, the loan amount, type of product, can all affect the comparison rate.

What do I need to know relating to comparison rates?

Items that are included in calculating the comparison rate include:

  • The actual interest rate of the loan
  • Fees and charges applicable to the loan
  • The loan term – such as 25 years vs 30 years
  • The loan amount
  • Repayment frequency

What information is not included in the comparison rate?

These costs below are not included in the comparison rate calculation:

  • Government fees such as stamp duty, registration of mortgage, registration of transfer etc
  • Break cost of early termination of a fixed rate home loan
  • Redraw fees that may be applicable to access additional repayments you’ve made
  • Late payment fees which are charged for missed or late repayments
  • Legal fees

Some may argue that comparison rates do not give the borrower an accurate picture of the home loan cost the example provided by the comparison scenario often does not reflect the borrower’s situation.

As the comparison rate was introduced in 2003, it does not reflect the average loan amount or the term of home loans being requested by borrowers.

For example, $150k with a 25 year loan term may not be the best reflection of what the true cost of the loan is.

A better way to understand the cost of your loan is to ensure you understand all the fees and charges that may be applicable to your loan and under what circumstances.

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