You can’t go to a bank or other lender’s website without seeing the term “Comparison Rate”. But what does it mean and why is it so important?
Government rules since 2003 have required that for home loans and personal loans (this means these lending rules do not apply to businesses) the home loan rate advertised must help us make the best decision for all needs – it must put all banks and building societies on a level playing field when we are making our decision about the real cost of the home or a personal loan.
Kind of like comparison pricing in the supermarkets, but for a much more important life decision.
[pullquote align=”left” cite=”” link=”” color=”” class=”” size=””]Comparison rates can help you get the best mortgage possible.[/pullquote]
How? When getting a home loan, information is always priceless.
The comparison rates are that you are a percentage made up of:
- the amount of the loan;
- the term of the loan;
- the repayment frequency;
- the interest rate; and
- the fees and charges connected with the loan. This includes upfront fees, ongoing fees.
This rate is one little number that should show potential borrowers the total annual cost of a mortgage they are considering.
However, buyers should consider there may be some dangers in choosing their loan solely on the comparison rate.
These can be on oversimplified calculation of what each bank and building society is offering. The following features are not disclosed in the calculation:
- Any fees charged for early repayment of the loan
- Government fees and charges
- Approval fees nor ongoing fees and charges
- Flexibility features of the mortgage, for example redraw facilities
- If a loan offers an offset account (which can reduce a borrowers cost)
- Interest rates always depend on both loan terms and whether they are fixed or variable loans. There is no mechanism for this in the calculation, which uses a fixed period of 25 years)
With many important features left out, the comparison rate is clearly a base calculation, however it is a great tool that helps when starting to shop around for your home loan.
Used as a guide, and not the only consideration, it can be helpful to borrowers. Each loan has its own features, such as redraw facilities, that can be valuable to many borrowers. But also many have hidden costs, fees and charges that need to be found and considered when comparing loans.
Our verdict: While the comparison rate is helpful, it does not provide all this information. So take a closer look.