When buying a home, there are new decisions, considerations and jargon to decipher. Even interest rates can be confusing – with a ‘comparison rate’ being shown beside the advertised rate.
What is a comparison rate?
When home loan interest rates are displayed, a comparison rate is also shown alongside it. A comparison rate helps you compare the costs of different home loans. They take into account the interest you will be charged and known fees relating to the home loan.
This can help you understand the actual cost of a home loan. For example, one home loan may have an interest rate of 5% p.a. and a comparison rate of 5.5% p.a. when fees are included. Another loan may have a lower interest rate of 4.5% p.a., but a comparison rate of 6% p.a. because it has higher fees either initially or over the life of the loan.
The second loan may look more attractive because of its lower interest rate, but the comparison rate helps you understand the actual cost when specific fees are considered.
And all comparison rates are calculated on a designated amount for a set term, so it helps you to compare apples with apples.
Costs to consider in addition to the comparison rate
Comparison rates consider ‘known’ account fees; however, there are other items you will want to consider and understand, such as stamp duty and conveyancing fees associated with the initial purchase of a property and fees for optional features. There may also be government charges, which can vary depending on your location and the property you are buying.
It’s also important to look holistically at all the features a home loan offers and consider the savings that could be made through features such as an offset account or access to additional repayments through redraw. Other features like making extra payments and splitting your loan between fixed and variable interest rates are not included in the comparison rate calculation. Still, they should be part of your decision-making when determining which home loan suits you.
This article is intended to provide general information of an educational nature only. It does not regard any reader’s financial situation or needs and must not be relied upon as financial product advice.
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