Home loan comparison rates
When you’re looking around for a home loan you may notice something called the comparison rate. This is a rate that the government obliges lenders to display so that it’s easy to tell the difference between similar products. It makes it harder for lenders to present information about loans in ways that are deliberately misleading and designed to make them look cheaper than they really are.
Understanding comparison rates
The comparison rate doesn’t just take interest into account but also includes some types of fees and charges associated with the loan. This means that you can use it to work out what your monthly repayments will be across different loan terms. All lenders have to calculate this rate in the same way to make it easier for you to determine which loan is offering you the best deal. Never be tempted to ignore the comparison rate just because the listed interest rate looks a lot lower.
What is the comparison rate based on?
The comparison rate is calculated based on a loan size of $150,000 with a term of 25 years. If you are looking for a significantly shorter or longer loan term or you plan to borrow considerably less or considerably more money, you may need to find a different way of comparing loans.
Why does the comparison rate differ from the interest rate?
The home loan comparison rate on a loan can be different from the advertised interest rate because it also takes other factors into account. It’s designed to help you understand how much you will pay for your loan overall, in relation to the duration of the loan. Looking at the interest rate alone can be misleading, and if you base your decision on the interest rate alone then you could end up paying a lot more than you need.
Why use comparison rates?
Using the comparison rate is a great way to narrow down a group of loans that have the features you’re looking for. It can’t tell you everything because different types of loans suit people in different circumstances, so you will need to consider other factors, such as the length of the loan term, to work out the best product for you. Being able to compare the basic cost of interest and fees is, however, a great place to start.
The key facts sheet
One other tool that can help you to compare loans is the key facts sheet. This is another thing that the government requires lenders to produce so that it’s harder for them to mislead borrowers. It provides you with all the important numbers you need to make a good decision, and helps you see at a glance how the key features of different loans add up so you can work out which one best suits your particular circumstances. If you don’t see the key facts sheet advertised alongside a loan, you are always within your rights to ask for a copy.