A crucial component borrowers must consider when shopping for a home loan is its comparison rate, which can tell them the true cost of a loan.
But what is the comparison rate exactly and how does it differ from the advertised rate? How is it even calculated?
What is a comparison rate?
A comparison rate is a single percentage figure that provides borrowers with a more comprehensive view of the overall cost of the loan at a glance. It tells the true cost of a home loan, combining the advertised interest rate with all the fees and charges associated with the loan.
The Australian Securities and Investments Commission (ASIC) requires lenders to display the comparison rate alongside the advertised rate to ensure transparency and help borrowers make better-informed decisions.
How is the comparison rate different from the advertised rate?
While the advertised rate — which is often referred to as the “headline rate” or “base rate” — represents the headline interest rate charged on the loan principal, the comparison rate incorporates additional fees and charges associated with the loan, such as application fees and ongoing fees.
By including these costs, the comparison rate offers borrowers a more accurate assessment of the overall expenses they will incur over the loan term. It allows borrowers to compare different loan offers on a level playing field and make more informed decisions when choosing a home loan that best suits their financial needs.
What factors do lenders use when calculating the comparison rate?
Several factors are considered when lenders calculate the comparison rate. The most significant things taken into account are the following:
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Interest cost. This is the actual cost charged by the lender for the home loan, often represented by the advertised rate.
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Fees and charges. These costs include everything charged by the lender for the application process, maintenance, and additional features.
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Loan term. A longer loan term usually has a higher comparison rate.
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Loan amount. Comparison rates usually vary depending on loan amount — some banks provide discounts for larger loan amounts.
What fees are included in the comparison rate calculation?
The comparison rate calculation includes some fees associated with the loan, while others are excluded. The table below outlines which costs are incorporated and which ones are not in the calculation of the comparison rate:
|
Included in Comparison Rate |
Excluded from Comparison Rate |
|
Interest rate – primary cost of the loan |
Government fees – including stamp duty and mortgage registration fees |
|
Upfront fees – including application fees and loan establishment fees |
Valuation fees – cost to assess the value of the home |
|
Ongoing fees – annual fees, monthly account-keeping fees |
Legal fees – settlement costs |
|
Other known fees related to the loan — fees for offset account etc. |
Early termination or exit fees – includes charges related to loan options that may not be utilised by the borrower |
The components mentioned in the table are indicative and may vary depending on the lender and the specific loan product.
It is highly suggested that you carefully review your home loan's Product Disclosure Statement (PDS) and terms and conditions to understand precisely what is encompassed in the comparison rate.
Why is it important to compare loans?
Comparison rates give you the opportunity to analyse each mortgage product and determine which suits your needs and financial capacity.
You have to see to it that you compare home loans accurately by looking at offerings that are of the same type. You do not want to compare a fixed-rate loan with a variable-rate loan, as they will have different interest rates. It is also suggested that you weigh the comparison rates of home-loan products with similar features.
Your goal is to get the best deal, therefore comparing home loans is almost always necessary. After all, a home purchase is one of, if not the, biggest transactions you will ever make, so it pays to do some research.
An ideal deal will also give you the best value for money. What might seem like a quite small difference in comparison rates could help you save thousands on your home loan.
Frequently asked questions about comparison rates
Here are some commonly asked questions about home loan comparison rates and how they are used:
Why would the comparison rate be lower than the advertised rate?
A lower comparison rate indicates that the loan has relatively lower additional costs compared to the interest rate. This can happen due to factors such as discounts, fee waivers, or the inclusion of beneficial loan features like offset accounts or redraw facilities that help reduce the effective interest rate.
When the comparison rate is lower than the advertised rate, ask your lender if your home loan is part of any package or special offers.
When variable rates are relatively low, fixed-rate home loans usually come at a higher advertised rate. This, however, changes with the rate cycle.
How do I find the comparison rate?
Comparison rates are usually found alongside the advertised rate of a home loan — lenders are legally required to show the comparison rates of their home loan offers when advertising for transparency and to avoid instances of hidden fees and charges.
Should I look at the comparison rate?
Yes, it is a good practice to use the comparison rate when looking for home loans, especially when you are considering options from different lenders. Comparison rates allow you see the overall cost of the loan and compare it to similar products in the market.
Should I always choose a loan with the lowest comparison rate?
While a low comparison rate can be attractive, it is essential to consider other factors as well, such as the loan features, repayment terms, and the lender's reputation for customer service. The loan that best suits your needs may not always come with the lowest comparison rate.
Is the comparison rate fixed for the entire loan term?
No, the comparison rate is calculated based on the current loan terms and fees at the time of comparison. If the fees or features of the loan change over time, the comparison rate might also change.
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Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.08% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 STAR CUSTOMER RATINGS |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Disclosure | |||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
Collections: Home Loan Application Interest Rates
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