When you're comparing different home loans, there's a range of fees, charges, and interest rates to take into account. While two loans may have the same principal and interest rate, the true cost of each loan could vary greatly depending on the fees and charges different lenders have.
A comparison rate is a means of standardising the true cost of a loan so that you can quickly determine how affordable it is.
By law, banks and other lenders need to display a comparison rate next to the advertised interest rate of their loan products. This helps to protect consumers from being misled by a low advertised interest rate with high fees and charges attached to it.
When you're researching different home loan products, it's important to understand that the loans with the lowest interest rate are not necessarily the cheapest. If two loans have the same interest rate, one of them could cost you thousands more due to the fees and charges that come with it.
A comparison rate gives you a more precise understanding of how much a loan will cost you. With this information, you can more easily identify the loan that best suits your circumstances.
The comparison rate of a home loan combines the:
All this information is compared against a standard $150,000, secured home loan with a term of 25 years, and the percentage reflects how much more expensive the loan you are considering is.
A comparison rate of 0% means that you're not being charged any interest, which you won't actually find anywhere (no lender gives away money for free). When you are considering two loans, the one with the higher comparison rate is the more expensive one.
While a comparison rate is useful in determining the true cost of the loan, it is not absolute, and there are variables that can influence its accuracy. The comparison rate is calculated based on a series of assumptions that may not prove true over the life of the loan.
There is also a series of fees and charges that a comparison rate does not take into account, such as:
With this in mind, you should only use this comparison rate calculator as a guide to help you compare loans from different lenders. The formula for calculating the comparison rate is determined by the Consumer Credit Code, something that all banks and lenders subscribe to.