Expert Advice by Paul Wilson
A question I field often from investors is, just what is a mortgage comparison rate and how can you use it to get a better deal on your home loan?
Here’s the thing: the interest rate you pay on your loan is just one part of the cost equation. You may also be liable to pay annual package fees and/or monthly account-keeping fees, and your interest rate could be discounted further, depending on the size of your loan.
There are several variables at play and so, comparison rates were introduced a number of years ago, in an effort to help consumers compare ‘apples with apples’ when reviewing different home loans.
In a nutshell, a comparison rate considers the loan amount, term, repayment frequency, interest rate and other ongoing fees and charges connected with the loan. It then combines the applicable interest rate and the fees and charges relating to a loan, and represents it as a single percentage figure. Lenders are obliged by law to include this comparison rate when advertising a loan interest rate.
In saying that, comparison rates are often misunderstood amongst borrowers and it’s important to note that an advertised comparison rate may not apply to your specific situation. Here’s why…
Let’s say you see a home loan rate advertised as follows: 4.89% (5.55% comparison rate).
The key here is to read the small print. It will usually say something along the lines of: ‘The comparison rate is based on a $150,000 loan over 25 years. Warning, this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.’
This means that for a loan of $150,000 over 25 years at 4.89%, with all relevant fees and charges taken into consideration, the actual amount the loan will cost is 5.55%.
However, if you calculate the exact same loan product on a different loan value – for instance, $300,000 over 25 years at 4.89% – then the comparison rate might be 5.25%.
Recalculate it again with the same loan amount of $150,000 but spread it over 30 years at 4.89%, and the comparison rate might be 5.35%.
Every time you tweak one factor of the equation, the comparison rate can change. As a result, while comparison rates are a good starting point, they won’t be the defining factor you’ll consider when evaluating loans.
You also need to be aware that a comparison rate doesn’t take into account other costs you may incur at the beginning of the loan, such as loan establishment fees and approval fees. These can vary widely, so you really need to do your research to make sure you’re getting the best deal for your requirements.
Remember, a loan is about more than the cost – you need to consider other loan features and flexibility factors such as offset and redraw, and fixed versus variable terms. A good mortgage broker can walk you through the process and help you to find the right loan for your specific situation.
Paul Wilson is an Independent Property Investing Expert and the founder of We Find Houses, Educating Property Investors & We Find Finance. Paul has been educating and coaching investors since 2001. Paul provides valuable, independent guidance and support by teaching strategies on how you can invest successfully while protecting yourself from commission hungry sales agents and property spruikers. Protect yourself with knowledge, contact Paul today for a complimentary consultation on 1800 600 890 or email email@example.com
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.