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What is a comparison rate?

Comparison Rate

Ever wondered why lenders include a standard rate and a comparison rate on their loans? Confused about why one is higher than the other? Which one are you supposed to use to compare loans anyway?

If you are comparing loans online, you probably have one or two questions about the lending process – especially if you are new to borrowing. When it comes to comparison rates, they are actually on your side – they are designed to make comparing loans easier.

A comparison rate is a tool that can help you identify the true cost of a loan, allowing you to compare a number of loans and find the best deal.

It is a rate that includes the loan’s interest rate as well as the fees and charges associated with the loan, combined to create a single percentage rate that can be used for comparison.

Australian lenders are obliged by law to include this rate when advertising a loan interest rate – which is why you will always see a lender’s standard rate and comparison rate together.

What’s included?

The rate is made up of the following:

  • the amount of the loan,
  • the term of the loan,
  • the repayment frequency,
  • the interest rate,
  • the fees and charges connected with the loan (such as establishment fees, approval fees, and any upfront or ongoing fees).

What’s not included?

This is where things can get a bit tricky. While comparison rates are great for comparing the basics of a loan, giving you a better idea of the real cost of a loan, they do have their limitations.

The rate does not include:

  • Government charges, such as stamp duty or mortgage registration fees,
  • Fees and charges that are only charged under certain circumstances,
  • Fees and charges that are not ascertainable at the time the comparison rate is provided.

The rate also doesn’t take into account certain other factors that may affect the overall cost of the loan, such as flexible repayment schedules, fee free banking and so on.

It’s also important to think about what the rate is based on. The rate you see could be based on a $150,000 loan over a 25 year term. Unless you are borrowing the same amount over the same duration, it will not be a true representation of the cost of your loan.

If you are borrowing $350,000 over 30 years, the overall cost of your loan will be quite different to that of the comparison rate. Be sure to check what the comparison rate is based on before you make any big decisions.

Using comparison rates

A comparison rate is certainly a good starting point and a useful tool for anyone wanting to compare loans. However, it’s important to look beyond the this when you start getting serious about a loan.

Think about what is included in the rate, what’s not included, and whether that rate represents the loan you are looking for. If you are unsure, contact the lender before you apply.

As always you should remember that getting advice from a Lend Me Mortgage Broker is free, and we will help you navigate all of these questions and considerations when comparing home loans. Call 08 6234 6400 or email now…

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