What you need to know about the comparison rate... - Pearl Financial

What you need to know about the comparison rate…

By Shane | Fundamentals

Nov 17

Banks and other lenders are legally required to display a comparison rate, particularly when advertising any loan interest rate. But in the mortgage marketplace, comparison rates are often misunderstood amongst borrowers. First of all, you have to identify all that you need to know about the comparison rate and what’s included in it.

Home Loan Comparison Rate

Comparison rates were made mandatory in an attempt to discourage lenders from publicly promoting unbelievably low-interest rates that attracted unsuspecting borrower into loans that truly cost them more than they expected. This law helps you decide accordingly after being informed of the true costs of a home loan.

Primarily, a comparison rate is a way to help borrowers identify the actual cost of a loan. It is a rate that comprises both the interest rate and the fees and charges pertaining to a loan, combined into a single percentage figure.

Most people preferably use the loan interest rate to compare different loans. The interest rate is considered a good start, however, other costs such as establishment fees, approval fees and any upfront or ongoing fees that encompasses the overall cost of a loan aren’t taken into reason.

A comparison rate covers the amount and term of the loan, the occurrence of repayment, the interest rate, and the costs and charges associated with the loan. It is a useful tool for borrowers to compare the costs of different loans. An effective home loan comparison can guarantee that you finance your property and get the features and rates you want.

  • It includes the interest rate which is the annual percentage rate you will be charged with the amount you owe to the lender.
  • A monthly account fee for your mortgage will be charged by the lenders.
  • The amount of the loan is also included in the comparison rate which will show you the amount of interest you’ll pay depending greatly on the amount you owe. The loan amount is an essential detail in calculating the comparison rate.
  • You’ll pay more interest if the loan term is longer in which would mean a higher comparison rate. If you want to lower your regular repayments, be sure to keep your lender updated on how much longer you want to extend the term of the loan so you know exactly how much extra you’ll sustain.
  • Every time you make a repayment, the interest you’re paying changes. If you are lowering the principal amount on a weekly basis rather than on a monthly basis, you’ll acquire less interest and this will affect the comparison rate.

The comparison rate of a loan is a good tool, but you need a lot more. There are many costs and benefits associated with each loan from each different lending institution. For example, the ability to make extra repayments with no fee can save a lot of money by paying a loan off early. Other factors such as redraw or 100% offset can increase the value of a loan and compensate for a higher comparison rate. Get help with choosing your first home loan. 

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About the Author

Shane specialises in helping Gen Y professionals and business owners make an impact by accumulating more assets, generating more income, and having more time to enjoy life. He has a Master of Applied Finance, an MBA, and a Master of Financial Planning. He is also a terrible golfer.

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