A comparison rate is a tool to help consumers identify the true cost of a loan by reducing the costs of a loan—including interest & fees—into a single percentage rate to easily compare the true cost of home loans. We can use comparison rates to compare various loans from different lenders.
Why do we have them?
To reveal any hidden costs or charges associated with a home loan.
How are they calculated?
Application Fees and ongoing fees are reduced to a single percentage rate and added to the actual rate for comparison. If a loan has no fees the comparison rate should be the same as the actual rate. Here’s an example:
| Lender A | Lender B | |
|---|---|---|
| Amount | $350,000 | $350,000 |
| Term | 30yrs | 30yrs |
| Actual Rate | 4.24% | 4.39% |
| Application Fees | $600 | $600 |
| Fees | $395 per year | $0 |
| Comparison Rate | 4.42% | 4.41% |
So Lender B is the better option then?
Not necessarily. Advertised comparison rates don’t include fee waivers, discounts or other benefits. In the example, Lender A regularly waives the application fee on request but Lender B does not. This would make Lender A’s comparison rate 4.40%.
Why else should I be cautious about comparison rates?
The calculation does not take into account financial benefits gained from other features associated with the home loan such as:
- Interest savings from a 100% offset account or loan trimmer account
- Associated fee waivers on credit cards or bank accounts
- Associated discounts on insurances and other services
So what is a comparison rate good for then?
They are very good when comparing introductory/fixed rate loans as the comparison is based on the full loan term not just the intro period. Here’s an example:
| Lender A | Lender B | |
|---|---|---|
| Amount | $350,000 | $350,000 |
| Term | 30yrs | 30yrs |
| 3yr Intro Rate | 3.99% | 3.99% |
| After 3yr Rate | 5.24% | 4.24% |
| Application Fees | $600 | $600 |
| Fees | $10 mth | $10 mth |
| Comparison Rate | 4.97% | 4.22% |
The large difference in comparison rates quickly raises an alarm. It has revealed Lender A’s catch to their special offer. That is a much higher rate after the intro term. The comparison rate very quickly identified this issue without the borrower having to do too much analysis.
Should I rely on comparison rates to decide what loan is best?
No. They are a guide only. Speak to a professional mortgage broker who will undertake a detailed comparison of all features, benefits & costs to ensure you have accurate information to be able to make good financial decisions.
