Understanding Comparison rates

Comparing apples with oranges doesn’t make sense. To make finding the right loan easier, and to make advertised rates as transparent as possible, we have comparison rates.

You’re looking for the best mortgage deal and you see an ad. It shouts ‘3.8% INTEREST!’ and, underneath that seemingly too-good-to-be-true rate, ‘7.9% comparison rate’. What does this mean?

“A comparison rate takes into account all of the fees and charges that can be applied to a home loan and rolls them into the interest rate, showing you a figure that is a more accurate reflection of what you will actually be paying. This can show that the loan with the cheapest interest rate may not necessarily be the cheapest loan” explains Great Ocean Road Finance director Michael Nyhof

In 2003, an amendment was made to the Uniform Consumer Credit Code (UCCC) that required comparison rates to be included in advertising. This change was made so that customers were not easily misled when it came to home loan interest rates. The UCCC has since been replaced by the National Credit Code and the comparison rate requirement remains.

This allows consumers to compare apples with apples, to an extent. It does make it much simpler to hold two loan products side by side and, regardless of whether one has a slightly higher interest rate and no fees while the other is a super-low interest rate with high fees, see at a glance which one is the better deal financially.

However, it isn’t always this simple. Fees and charges, the rate at which principle is paid down and the total interest paid over the loan term all change depending on the loan amount and on the term, so you need to delve a little further into how that comparison rate is calculated.

While the comparison rate itself must be as prominently displayed as the interest rate – not buried in tiny fine print – somewhere on the advertisement, there will be a statement along the lines of ‘Comparison rate calculated on a loan of $150,000 for a term of 25 years, with monthly repayments’. If your loan is going to be for $900,000, the comparison rate for your loan will be vastly different.

“Sometimes comparison rates themselves can be a little misleading. Some lenders have loans that have an interest rate discount under a package, but you pay an annual fee for that package. Say for example there is an annual fee of $300 for the home loan package that gets you a 0.1% discount off the standard variable rate. You would have to  have a loan of more than $300,000 in order to save more in interest than the fee is costing you. In the example used on the lenders website (which is usually for a $150,000 loan over 25 years) this would show that the package loan comparison rate would not be very good compared to a standard rate loan even if the loan you are seeking is greater than $300,000. This is where Home Loan Key Fact Sheets come into play.”

It is now a requirement under the National Consumer Credit Protection Act (2009) that all lenders selling standard home loans are able to provide a home loan key facts sheet, which gives you a personalised comparison rate for the loan you are seeking. This will take into account your desired term and loan amount to deliver a much more accurate reflection of what you are likely to be paying back if you just meet the minimum loan repayments over the selected term. Another thing that makes this even easier is that the format of these key facts sheets are the same across all lenders – even down to the colours used! However – they are only for Principal, and interest loans (not interest only or lines of credit) and they can still only show you what you will be paying at today’s rates and cannot take into account rate movements over the term of the loan.

Great Ocean Road Finance are MFAA Approved Finance Brokers who can help you make sense of advertised interest rates and calculate comparison rates for your specific circumstances.

To discuss further, either call us on 0410 641 284 or make an appointment online at https://greatoceanroadfinance.com.au/contact-us