People often ask us what is a comparison rate? It is largely because you will see a loan (normally a home loan) that states one rate but then also mentions a comparison rate underneath (often in smaller writing).
The main rate you often see is called a ‘headline rate’ – which is the interest rate your loan will charge you excluding any fees and charges. Sort of like a baseline mortgage rate if you will. When fees and charges are included to the rate, it is then called the comparison rate.
Most people will look at the headline rate and believe that means their mortgage or home loan will be charged at that particular rate – the truth is it won’t. In fact, if you have gone with a home loan provider simply due to their headline rate, you have already failed the money savers test. Without understanding what the comparison rate is, you will forever be confused about how your home loan charges you interest.
Beware of interest rates that don’t state a comparison rate
Headline interest rates are exactly that – they are made to grab your attention (turn your head). They are not actually a true reflection of the overall value in your home loan.
The mortgage comparison rate in turn will give you the exact interest rate you are effectively going to be charged once all fees and charges are included.
What is a comparison rate?
In Australia, by law a loan provider must clearly state the comparison rate of your home loan. It is a legislated requirement, in fact – ASIC (Australian Securities and Investments Commission) state that the comparison rate must be of equal size on the page to that of the headline rate.
This is to help consumers clearly see the rate they will be charged with all fees, charges and commissions included.
In the past, many lenders would make the comparison rate quite small in order to conceal the true interest rate. ASIC however are now enforcing that lenders be very clear with the comparison rate and display it on the page with ‘equal prominence’. This means the size of the rate shouldn’t be hidden.
Effectively what this menas is that the comparison rate is your true, fully loaded, full fee rate you pay on your home loan.
Comparison rate calculator
It is also wise to note that many home loan lenders will actually offer calculators to help you see the true comparison rate. This is because there is often a complex formula on how to calculate a comparison rate. Instead of trying to guess, be sure to ask your home loan lender before signing up to tell you the exact comparison rate of your mortgage.
We advise you to try and avoid calculating your own comparison rate, instead asking for written evidence of the comparison rate from your lender. You will need this proof later on should you want to question your fees and charges. Calculating your own comparison rate can often lead to mistakes so please be careful.
If you are hunting a cheap home loan rate, the comparison rate is key
When looking at home loans (and other loans for that matter) – be sure to always go directly to the comparison rate as a way to compare apples with apples.
It will save you money and help you compare home loans on the same level. No point comparing home loans only to find out later that your provider charges a heap of fees and charges that will bump up your interest rate.
Tips to keep in mind when working with a lender
Some lenders or mortgage brokers try and act like the interest rate itself is the most important facet of your loan. Though what you have to remember, is that the actual interest rate – without fee’s and charges included – isn’t a very good interpretation of value as mentioned above.
As someone who is very scrupulous when it comes to getting the best deal, I cannot tell you how many lenders have tried to pull the wool over my eyes by avoiding the comparison rate. Remember that ‘financial experts’ and people who help you with home loans, aren’t always working in your best interest. Stay cynical so you always hunt for the best deal.
By law they must show you the comparison rate
Part of the ‘better banking’ reforms by the Government here in Australia state that lenders must provide ‘home loan fact sheets’ – a one page document that gives you all the important details of your loan along with the comparison rate. Insist on receiving this before progressing any further with your mortgage.