What is a home loan comparison rate?
A comparison rate is designed to represent a closer estimate of the total cost of a loan per year. It is expressed as an annual percentage rate and includes the loan’s interest rate as well as most upfront and ongoing fees and charges. Lenders are legally required to show customers a comparison rate alongside a product’s interest rate.
What is the difference between the interest rate and the comparison rate?
The interest rate reflects how much interest you will be charged per year on the balance of your loan. This affects your monthly repayments.
The comparison rate, on the other hand, combines the interest rate plus most fees and charges that come with the loan. This is designed to help you identify the cost of the loan more accurately and make it easier to compare products.
How are comparison rates calculated?
Home loan comparison rates are calculated based on a $150,000 loan, over a 25-year loan term. Comparison rates take into account:
- Interest rate (including any revert rate that applies to the loan after a set period of time)
- Fees and charges (including upfront costs like establishment fees and valuation fees and ongoing costs such as monthly or annual fees)
- Repayment frequency
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value.
Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning
The comparison rate should be used as a guide only, to compare ‘like for like’ products. This is because the average mortgage size in Australia is much higher than $150,000. According to Australian Bureau of Statistics (ABS) data analysed by CommSec, in December 2019, the average new mortgage for an owner-occupier was $497,900. As well as that, your home loan may be longer or shorter than 25 years.
The comparison rate also does not take into account all fees and charges related to a loan. For example, it does not include fees and charges that are incurred in specific circumstances, such as early repayment fees and redraw fees. It also does not consider potential cost saving options such as fee waivers and offset accounts.
Additionally, it does not include external government fees and charges that usually apply to purchasing a property, such as stamp duty.
Does the comparison rate make a big difference?
The comparison rate for a loan can reveal quite a difference in costs between two loans that have the same advertised interest rate.
If you were just considering interest rates, you might think two loans cost the same. But the comparison rate can help to reveal whether one loan costs more than the other.
Here’s a hypothetical example of how that may work:
|Impact of Fees on Comparison Rate|
|Home Loan A||Home Loan B||Home Loan C|
|Average Interest Rate||3.46%||3.46%||3.46%|
|Total Fees Paid Over Life Of Loan||$0||$900||$10,800|
|Source: www.canstar.com.au – 29/06/2020. Based on a hypothetical set of owner-occupier variable loans for a loan amount of $400,000, 80% LVR and principal & interest repayments; excluding introductory, special condition and first home buyer-only loans. Assumes a total loan term of 30 years. Based on three loans with the average interest rate and differing hypothetical fee amounts. Comparison rates calculated based on a $150,000 loan amount over a total loan term of 25 years.|
Choosing the best possible loan for your situation could mean thousands of dollars saved in fees over the years. Checking the comparison rate can help you to choose a loan with an overall annual cost you can afford. However, be aware that a more expensive loan may offer different features, such as an offset account, redraw facility or portability, which may contribute to its overall value.
Where do you find the comparison rate?
Lenders are legally required to display comparison rates whenever they advertise a home loan interest rate. For example, you may see a home loan advertisement with the text: Variable interest rate 3.29%, comparison rate 3.70%, based on a loan of $150,000 over 25 years. Lenders must also include a comparison rate warning about the accuracy of the comparison rate.
Another helpful place to look is the key facts sheet, where the lender should specify information including the comparison rate, interest rate, and the total amount to be paid back over the life of the loan.
Canstar lists the comparison rate alongside the advertised interest rate for each loan in our comparison tables. We also enable consumers to sort home loan products by comparison rate. You can find comparison rates on home loans for various purposes – Refinancing, First Home Buyers, Next Home Buyers, Investing, Line of Credit and Construction Home Loans.
Lenders must also display comparison rates for personal loan and car loan products (however, these rates are based on different loan amounts and loan terms). Canstar also displays comparison rates and interest rates for these products.
This article was originally written by William Jolly.
Main image source: Vitaliy Krasovskiy (Shutterstock).