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What do comparison rates really mean?
May 3, 2011
With deregulation of the finance sector in the 1980s came a stampede of new mortgage products. While home buyers no longer had to endure that nerve racking interview with a bank manger who had the power to implode their dream of home ownership with a stroke of a pen, in its place came a rabbit’s warren of mortgages, each with a labyrinth of fees and charges that made comparing loans a real headache.
For this reason, the government introduced the Comparison Rate, a fictional interest rate designed to demonstrate to potential mortgagees exactly how much a home loan will cost.
So here’s how it works. The comparison rate (for home loans)is based on a $150,000 loan paid off over 25 years to demonstrate how much you would be paying overall, including interest, fees and charges.
All lenders are legally obligated to demonstrate their comparison rate in all advertising, in their offices and when you apply for a loan.
Of course, the system isn’t foolproof even if it has levelled the playing field. Things become murky when less basic transactions come into play such as if you are borrowing $500,000 that you plan to redraw on and then refinance after a set period. The situation has now changed, so what was initially the "cheaper" home loan could now be more expensive. The comparison rate also means borrowers have to wrap their head around two lots of interest rates.
It's become a fine line between useful information and information overload to compare home loans in 2011 so just remember to focus on your own needs and you'll be fine!
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