What is a home loan comparison rate (in Australia)?

Guides
by
Dawn Teh

Comparison rates are helpful to understand if you're considering a loan or lending product, and you're likely to come across comparison rates if you're looking at a home loan. A comparison rate represents the actual cost of a loan and aims to break that down into a simple-to-understand number, hence why it is represented in the form of a comparable interest rate. This is a crucial rate to understand if you want a home loan.

This article will explain more about the comparison rate, how it is calculated, what things aren't covered in the comparison rate and why it matters when you are looking to choose your next home loan.

What is a Home loan comparison rate?

A comparison rate looks at the overall try cost of your home loan. Unlike a standard variable rate home loan or fixed rate that is often spoken about, the comparison rate uses a formula to account for interest payments based on the advertised interest rate. Also, it includes different charges you may come across in your loan term.

A comparison rate is an interest rate, typically expressed as a percentage rate. It also includes any other fees on the loan, like monthly account fees. The rate will be higher than the standard or fixed rate because it takes into account the hidden costs you may overlook when speaking to a lender or mortgage broker. Your lender may also have a repayment calculator online that can help you understand your principal & interest repayments and your current borrowing power.

This can be a more holistic and honest way of considering how much you will pay back to your financial institution in the long run.

What does the comparison rate include?

The comparison rate is calculated using a formula that looks at the interest rate and other fees and charges. Due to this, the comparison rate will be higher than the advertised headline rate because it considers the additional costs. The comparison rate is calculated using the interest rate and other charges. Considerations include:

  • the amount of the loan
  • fees and charges
  • loan term (typically 25-30 years)
  • mortgage repayment frequency
  • interest rate (variable or fixed rate home loan)

Three categories are generally considered when calculating the comparison rate. This can differ between different lenders, so some fees may not apply:

  • Any upfront fees (valuation fees, application fees, legal costs)
  • Application fee
  • Pre-approval fee
  • Valuation fee
  • Documentation preparation charges
  • Legal fee
  • Settlement charges
  • Ongoing fees (monthly costs or package costs)
  • Monthly account-keeping fee
  • Annual fee's for the loan or package
  • Periodical admin fee
  • Discharge fees upon loan completion
  • Discharge fee
  • Documentation preparation charges
  • Settlement charges

Comparison rates are all calculated using a uniform loan amount of $150,000 and a loan term of 25 years, which might not be 100% accurate since most mortgages are more significant than this, and loans can go for 30 years +.

The general need for the comparison rate, though, is to ensure that deceptively low rates aren't being offset with giant fees and negatively impacting you in the long run.

What does the comparison rate not include?

The comparison rate doesn't include all fees and charges that you will encounter in the home-buying process. Things not included are:

  • Any optional items included in or added onto the loan. Some loan options not included are early repayment fees or redraw fees, a redraw facility, and offset accounts.
  • Any government charges, including mortgage fees, stamp duty or land title costs.
  • Any fees and charges that aren't available when the comparison rate is calculated and provided.
  • Any cost-saving waivers or offsets that can influence the cost of a loan. Including cashback offers.
  • Any extra extras the lenders may add, like fee-free credit cards, transaction accounts or discounts on personal loans.
  • Why pay attention to this rate?
  • When looking at the comparison rate, it is clear that the loan with the lowest interest rate can sometimes not be the cheapest option. If you just look at the interest rate, you may think that a loan is more affordable than a competitor, but once looking at the comparison rate, it could help reveal hidden costs that could make it more expensive. This rate can also help you decide what is best for your budget and long-term financial future.

Loans with a low-interest rate can sometimes have higher fees. Low-interest rate loans can sometimes not be applicable when the loan-to-value ratio (LVR) exceeds 80%. That is why when Australian borrowers are looking for a home loan. They should look at all of their options to understand home loan interest rare and the actual cost of the loan.

Depending on their policies and your financial situation, different providers and lenders will have other options. Each further home loan comparison will have a different comparison rate. As macro factors like the cash rate change, the comparison rate will also change, so it is essential to keep up to date with the changes.

Getting into your new home is exciting, but it is important to enquire with your lender or broker to make sure first-home buyers are getting the best home loan products for them. Situations will depend on the property value and financial circumstances.

When you are refinancing or your fixed-rate period ends, your rate will typically move to the standard variable rate or a basic home loan. A refinance period is another excellent time to check in on your comparison rate to ensure you aren't paying more than you need to when paying your home loan repayments.

Many home loan interest rates will impact your monthly repayments, so it's important to know what will affect you.

Learn more about variable interest rates and fixed-term interest rates.

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