If you’re looking to buy your dream house, it's important to understand and consider all the financial options available. And while searching for all the best home loan financial options, you will likely have stumbled across the term comparison rate. But what is this and what does it mean for your purchase?
The comparison rate doesn't give you every bit of information that you need. But it can be an incredibly useful tool in helping you to find the most competitive loan for your needs.
So, here’s everything you need to know about using comparison rates while shopping for your home loan.
What is a Comparison Rate?
A comparison rate gives you an approximate indication of what you'll pay for your loan. This includes interest rates and other charges and fees. In the comparison rate, these numbers are expressed as a single percentage figure. Because of that, it’s easy to compare the cost of loans from different lenders.
The interest rate isn’t the only factor that affects the cost of a loan. Fees and charges can add a significant amount of money to the total cost. So it’s important to take these into account when comparing loans.
Of course, any comparison rate is just a guide. It won’t take into account all the features, benefits and obligations of a specific loan. Because of that you should always read the fine print before signing any loan agreement.
How are they calculated?
To calculate a comparison rate, lenders use a standard formula that adds the following:
The interest rate
Monthly repayment
Term of the loan
Application fee
Any ongoing fees
The formula bases its calculations on a $150,000 loan, over a 25-year loan term to give you an approximate overall cost. This makes it easier to compare loans from different providers.
What isn’t included in the calculation?
The comparison rate can be a helpful tool, but it is only one part of the puzzle.
What they don’t include are:
The Difference Between Interest and Comparison Rates
Consumers use both interest rates and comparison rates to help them compare different loans.
The interest rate is the percentage of the loan that is charged as interest per month. The comparison rate is the total cost of the loan, including both the interest and any additional fees.
Because comparison rates consider most of the costs associated with a loan, they can be a better way to compare different loans. However, you should always do your own thorough research as even a marginal difference in the interest rate can be costly.
Are Comparison Rates Accurate?
The accuracy of comparison rates has been the subject of much debate in recent years. Critics argue that comparison rates are often misleading, as they exclude important fees and charges. Others believe that they are a useful tool for consumers, as they provide a clear and concise way to compare the costs of different home loans.
Both arguments are valid and are worth considering when you start your home buying journey. Comparison rates were first introduced in July 2003. A time when the average loan size was $150,000 over a 25-year period.
However, recent statistics show that the average home loan is between $400,000 - $500,000. And homeowners usually pay this off over a 30-year period. The amount of money you borrow, and the length of the loan will impact your true loan costs. This means that the current comparison calculation is outdated.
However, while comparison rates are not a true reflection of your specific repayments, they still provide an indication. This is useful when you first start weighing up your loan options. It is always best to speak to a financial professional to get expert advice before committing to a loan. The team at Lending Loop live and breathe these calculations, ensuring you get the most suitable loan.
Speak to an Expert
If you're looking to buy your first home, it can be an exciting yet daunting process. Luckily for you, our team has the experience and connections needed to make this transaction simple and straightforward!
We have access to a vast array of lenders with both bank and non-bank options. So we can ensure you know what all your options are, so that it's easier for us to match you with the perfect loan. We are basically a cupid for home buyers.
Our experienced team has got your back from the start of the process – right through to the end of your loan repayments. The door at Lending Loop is always open for ongoing support and advice.
Contact us today to get a free personal home loan assessment.
