What is a comparison rate?
When home loan interest rates are displayed, a comparison rate is also shown alongside it. A comparison rate helps you compare the costs of different home loans. They take into account not only the interest you will be charged, but also known fees and charges relating to the home loan.
This can help you understand the true cost of a home loan. For example, one home loan may have an interest rate of 5% p.a. and a comparison rate of 5.5% p.a. when fees and charges are included. Another loan may have a lower interest rate of 4.5% p.a., but a comparison rate of 6% p.a., because it has higher fees and charges either initially or over the life of the loan.
The second loan may look more attractive because of its lower interest rate, but the comparison rate helps you understand the true cost when certain fees and charges are taken into account.
And all comparison rates are calculated on a designated amount for a set term, so it helps you to compare apples with apples.
Costs to consider in addition to the comparison rate
Comparison rates take into consideration ‘known’ account fees and charges, however, there are other items you will want to take into account and understand, such as stamp duty and conveyancing fees associated with the initial purchase of a property, and fees for optional features. There may also be government charges, which can vary depending on your location and the property you are buying.
It’s also important to look holistically at all the features that a home loan offers, and consider the savings that could be made through features such as an offset account, or access to additional repayments through redraw. Other features like making extra payments and splitting your loan between fixed and variable interest rates are not included in the calculation of the comparison rate but should form part of your decision making when working out which home loan will suit you.