You may have seen it sitting beside an advertised interest rate or flagged in the fine print on the bottom of Lender websites, but do you know what a comparison rate means and why it’s there to help you?

What is a Comparison Rate?

A comparison rate can be considered an indicative rate designed to give you a “true” cost of a loan. It considers not only the interest rate of the new loan, but also any applicable fees or charges that may alter its value.

Although its compulsory for banks to show a comparison rate in their advertising, it should only be used as a guide as there are many factors that go into deciding whether a loan product is suitable for your unique requirements.

What Does a Comparison Rate Cover?

A comparison rate will factor in several key considerations that go into the cost of a loan facility, some of which may prove costly once added up. These are the key things it covers:

• Loan principal
• Loan term
• Repayment frequency
• Interest rate
• Known fees and charges, such as establishment and settlement fees and ongoing service fees.

What Does a Comparison Rate NOT Cover?

 The comparison rate is not an exact science and there are some factors that are not quantified within it. Therefore it’s prudent to know what these things are so you can do your own due diligence. Some of the factors that are not quantified within a comparison rate include:

• Government charges such as stamp duty
• Fees for additional services that may not be accessed regularly or are optional costs of the loan such as accessing redraw
• Fee waivers or savings enjoyed from special offers or packages products
• Added features like offset accounts and making extra repayments result in an overall reduction in the true cost of a loan but cannot be ascertained in a comparison rate.

How is the Comparison Rate Calculated?

Quite simply, for home loans, comparison rates are calculated on a loan of $150,000 over a 25-year term based on principal and interest repayments, in order to give you an indication of the cost of the loan. It’s a good tool for comparing apples to apples when looking at alternate loan products, but it’s not definitive in determining total costs associated with a loan.

Speak to Your Mortgage Broker for Clarity

As there are so many variables that go into what makes a loan suitable, the best solution is to speak to a Mortgage Broker who can offer sound guidance to help you make an informed decision. Your Broker will be able to assist you by weighing up features like loan products, terms, extra features and any Lender incentives offered to secure your business.

Although the comparison rate does offer a valuable insight into the cost of a potential loan, your Broker, acting as our unbiased advocate, will be able to arm you fully by comparing costs with benefits – something the comparison rate cannot do.