The Comparison Rate: What Is It and How Is It Calculated?
When browsing the mortgage marketplace, you’ll face hundreds of different interest rates. You may know what they represent, but have you ever wondered what the point of the comparison rate is? Perhaps, you misunderstood its purpose and needed some clarification; don’t worry, you aren’t alone.
According to the 2016 National Mortgage Survey, more than 2 in 3 Australians who had a mortgage or were looking for one did not understand what the comparison rate on a home loan meant. 43% of the respondents misunderstood what the comparison rate was, while another 28% admitted they had no idea.
The comparison rate helps you work out the actual cost of a loan. It is also referred to as the average annual percentage rate (AAPR) and represents the total cost of the loan per year. Not to be confused with the home loan interest rate, which only reflects how much interest you’ll be charged per year on the balance of your loan.
The comparison rate figure is derived from the amount of the loan, the length of the loan, the repayment frequency, the interest rate and most of the fees connected to the loan. By law, all lenders are legally required to display a comparison rate when advertising a loan.
As it's hard to compare home loans with different interest rates and fees alone, the comparison rate allows you to compare loans from different lenders to show how much it is likely to cost you.
Under the Uniform Consumer Credit Score (UCCC), when calculating the comparison rate, the final percentage is based on the following:
• $150,000 loan size
• 25-year term
• Principal and interest repayment loan
• Repayment frequency
• Interest rate
• Monthly account fee (if any)
• Annual fee (if any)
• Establishment fee (if any)
• Valuation fee (if any)
• Mortgage documentation fee (if any)
• Settlement fee
It doesn’t include government charges such as stamp duty or mortgage registration fees, charges associated with loan options that may not be used by the borrower and cost savings such as fee waivers and the availability of interest offset arrangements.
It’s important to always compare interest rates, product features and fees. Even a small difference in interest rate can make a significant difference to your repayments over time.
To be completely aware of the costs you are looking at and to fully understand the role of the comparison rate that applies to your loan, it is a good idea to speak to your broker. They’ll be able to explain exactly how the comparison rate will affect your repayments.
At Select, we offer no-obligation, quality and free home loan advice to help you reach your financial goals. Give us a call on (08) 9417 3399 to talk to us about your loan options and what home loan rate will suit your needs.