Researching home loans can be a confusing process, especially with all the rates and features to compare. What should you focus on? The interest rate? The comparison rate? It can all feel overwhelming if you’re refinancing and hoping to lock in a good deal.
Comparing interest rates on different loans is a great starting point, but the comparison rate can also be used to help form a view of the total cost of your loan. We explain how it’s calculated and why you shouldn’t ignore it.
What is the comparison rate?
The comparison rate is a figure that can help determine the cost of a loan based on a standardised loan amount ($150,000) and repayment term (25 years). It’s worked out by adding together the interest rate plus any standard fees and charges that affect the overall cost of the loan – such as establishment fees, settlement fees, account keeping fees or annual package fees. This total amount is then converted to a percentage rate.
From 2003, it’s been mandatory for lenders to provide both the interest rate and the comparison rate when advertising a loan on sites like Canstar and Finder. The comparison rate is also provided on the Key Facts Sheet for the loan, which you can request from the lender. Many banks offer online tools to help you generate a Key Facts Sheet for specific loans, so you can work out how different loans compare for the amount you’re borrowing and the loan term.
Can the comparison rate be misleading?
Yes. While comparison rates can be a great tool in providing a general idea of what a loan will cost you, these rates may not give you a totally accurate picture of your loan’s total cost.
That’s because comparison rates on home loans are typically based on the following:
- A secured loan amount of $150,000
- A 25-year loan term
- Principal and interest repayments (on a monthly basis).
Borrowing a different amount, opting for a longer or shorter loan term – even changing the frequency of your repayments, or any fees which a lender may waive would give you a different comparison rate.
Comparison rates also don’t include other hidden costs that may crop up over the life of your loan. These include costs such as stamp duty, conveyancing fees, late payment fees, break fees or early termination fees (which may apply if you pay your loan out before the end of the loan term). You may or may not need to pay these, but if you do it may significantly affect how much your mortgage costs you overall.
So, while comparison rates can be a useful guide, be aware that those you see quoted online may differ when applied to your specific home loan requirements.
How to use the comparison rate when refinancing
When comparing home loans, the comparison rate can be a handy tool – but it’s not the whole picture. In order to get the right loan for your needs, you should consider:
- The interest rate. Ideally, you want to refinance to a loan that’s considerably lower than the current rate you’re on, in order to make it worth your while.
- The comparison rate. As we’ve explained, this can give you a general idea of the loan’s true cost because it factors in both the loan’s interest rate and standard fees and charges. However, the rate will change depending on how much you’re borrowing and the loan term you opt for.
- The features of the loan. When refinancing you want to ensure the loan you’re choosing has all the features you’re after – whether that’s a split loan or redraw facility, an offset account or the flexibility to change the frequency of repayments.
- Any other conditions, fees and charges. Costs such as stamp duty and conveyancing should all be factored in, plus fees such as penalty rates for paying out your loan early (if that’s your goal).