Have you ever noticed that many banks advertise a great interest rate in big, bold font, but there is always a much smaller interest rate shown somewhere else on the same ad? That less-obvious interest rate is known as the comparison rate. Banks are legally required to display a comparison rate when advertising any type of loan.
So what is a mortgage comparison rate – and more importantly – how can it help you get a better deal on your home loan?
Essentially, a comparison rate is a way to help consumers identify the true cost of a loan. The displayed interest rate might be what you are charged in interest, but many banks, credit unions and financial institutions also charge a range of other fees and charges that could potentially mean you’re spending more money than you thought.
By showing a loan’s comparison rate, consumers have a better idea how much they’ll really pay after the interest, fees and charges are all taken into account.
How is a comparison rate calculated?
In order to determine the true cost of a loan, it’s important to take all the associated costs into account.
A comparison rate is made up of the following:
- The amount of the loan;
- The term of the loan;
- The repayment frequency;
- The interest rate; and
- The fees and charges associated with the loan.
It is a useful tool for borrowers to compare the cost of different loans. However, borrowers need to be aware the loan amounts and terms shown on a comparison rate don’t necessarily reflect the loan they require.
For example, you may see a loan advertised as follows:
Variable interest rate 4.25%, comparison rate 4.78% – based on loan of $150,000 over 25 years.
While this comparison rate reflects the true cost of this example loan, it would be a completely different figure for a loan size of $400,000, or for a loan term of 30 years.
It gets even more confusing when looking at the comparison rate for a fixed rate loan. That’s why it’s important to not only check the right rates, but make sure that you’re getting the right features for your personal financial situation.
A Nieuvision finance broker can help explain exactly what a comparison rate is as it relates to your own individual circumstances and how it will affect your loan repayments.
Finance & Property Consultant
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Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in our articles and newsletters. They contain general information only and have been prepared without taking into account your personal objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.