Q: I’m looking to refinance my home loan and a few friends have been saying that I should be looking at the comparison rate instead of the advertised interest rate. What is a comparison rate and do I really need to take it into consideration?
A: Your friends are right! It’s important to consider the comparison rate when taking out any kind of loan, whether it’s your home loan, a personal loan or car loan.
Many lenders will advertise their headline interest rate, which is their lowest interest rate, to attract your attention. However, if you look more closely at advertised interest rates you’ll notice that they include another rate, the comparison rate.
Advertising the comparison rate is mandated by law, and lenders have to advertise it alongside the interest rate.
This is because the comparison rate reveals the truer cost of a loan. It takes into account the interest rate PLUS most of the fees and charges relating to a loan, combined into a single percentage figure.
There won’t always be a big difference between the two, for example our Aussie Select Basic Variable Rate Home Loan for owner occupier loans has an interest rate of 4.24% p.a^ with a comparison rate just 0.01% higher, at 4.25% p.a*.
However, other lenders may have a bigger difference of 0.10%, 0.50% or even higher, which is certainly worth knowing about before you sign up.
Because it’s the law for lenders to show the comparison rate alongside their interest rate it’s easy for you to look at when considering a home loan, whether you’re on comparison websites or just looking at other lender advertising.
An accredited mortgage broker can also explain comparison rates to you in more detail, as well as other aspects of a home loan that you should be aware of, like loan features and flexibility.
Be careful not to get caught up in only the advertised interest rates and comparison rates. It’s important for borrowers to assess these figures based on the rates that would apply to your loan amount and loan term, as rates will vary according to these things.
You can do this by using the free mortgage calculators available across the web, or again by having an appointment with an expert mortgage broker who can calculate this for you specific to your circumstances.
Doing this will give you a truer indication of the interest rate you will be paying over the longer term.
If you go ahead with your refinance you might also be interested in our free Home Loan Refinancing Guide which has more tips and information like this.
Do you want to ask John a question? Submit it here and check back each Sunday to see if it’s been answered.
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^Rates are for owner occupier principal and interest loans and include discounts applied according to Loan to Valuation Ratio and Loan Value. For a full schedule of applicable rates for these products, click here. Applications are subject to approval. Conditions, fees and charges apply. Rates are subject to change.↩
*Aussie Select Basic Variable Rate has an interest rate of 4.24% p.a. with a comparison rate of 4.25% p.a., which is available for owner occupier loans with a loan to valuation ratio of less than or equal to 80% and borrowings less than $500,000. Investment loans are priced 0.35% p.a. higher. Applications are subject to approval. Conditions, fees and charges apply. Rate is effective from 06/07/15 but subject to change. Please check the applicable rate is still correct with your Aussie Mortgage Broker. Comparison rate above is based on a home loan of $150,000 for 25 years. WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. If you have any questions call 1300 44 55 66 and talk to an expert Aussie Mortgage Broker.
Credit services for Aussie Select and Aussie Optimizer products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133, Australian Credit Licence 414133. Credit for Aussie Optimizer products is provided by Perpetual Ltd ACN 000 431 827.↩