When shopping for a home loan, it’s easy to get fixated on the headline interest rate. But there’s a crucial piece of the puzzle that often gets overlooked: the comparison rate. This seemingly small number can make a big difference in your overall borrowing costs, so understanding its significance is essential.

What is the Comparison Rate?

The comparison rate is a standardised figure that provides a more accurate representation of the true cost of a loan. It combines the interest rate with most fees and charges associated with the loan, giving you a clearer picture of your overall expenses.

Why is it Important?

Here’s why the comparison rate is your secret weapon when comparing home loans:

• Apples-to-apples comparison: Lenders often lure borrowers with attractive headline interest rates, but hidden fees can significantly inflate the true cost. The comparison rate allows you to compare loans on a level playing field, considering all costs involved.
• Unveils hidden costs: Fees such as application fees, ongoing service fees, and annual package fees can add up significantly. The comparison rate factors these into the equation, giving you a more realistic view of your expenses.
• Empowers informed decisions: By considering the comparison rate, you can make informed choices based on the true cost of borrowing, not just the advertised interest rate.

What’s Included in the Comparison Rate?

While the comparison rate provides a more comprehensive picture, it’s important to note that it doesn’t include all possible costs. Typically, it includes:

• Interest rate: The base interest rate charged on the loan.
• Application fees: Fees associated with processing your loan application.
• Ongoing service fees: Regular fees charged for managing your loan account.
• Annual package fees: Fees associated with bundled banking packages.

What’s Excluded from the Comparison Rate?

Certain costs are typically excluded from the comparison rate, including:

• Government charges: Stamp duty, registration fees, and other government charges vary depending on your location and property value.
• Early repayment fees: Penalties for making extra repayments or paying off your loan early.
• Redraw fees: Fees for accessing redraw facilities on your loan.
• Lenders Mortgage Insurance (LMI): Insurance premiums payable when borrowing with a small deposit.

Don’t Be Fooled by the Headline Rate

While the headline interest rate is an important factor, it’s crucial not to be swayed solely by its allure. Always consider the comparison rate to understand the true cost of borrowing and make informed decisions that align with your financial goals.

Need help deciphering comparison rates?

We can help you navigate the complexities of home loans and ensure you understand the true cost of borrowing. Contact us today for expert advice and guidance.