What is a comparison rate?

What is a comparison rate?

When you think of comparison rates, you probably think of all interest rates that are available on the market, but were you aware that some interest rates are not actually comparison rates? If you weren’t then we’re here to help you out and give you the knowledge you need to make informed decisions when you’re shopping around with different lenders for the best interest rate. Now bear in mind that the best interest rate is not always the cheapest. it needs to take into consideration your personal circumstances as well, however if you’re unsure you should always seek financial advice from a registered financial adviser who can give you advice and recommendations.

A comparison rate is the rate by which you will be offered finance with a particular lender. It takes into consideration the interest rate, plus fees and other charges so when you’re analysing the comparison rate you need to consider all of these factors. It’s not just about the interest rate on its own.Once you have all these numbers from the different lenders you’re considering, you can then compare the different rates and make an informed decision.

Don’t be fooled. Just because the interest rate or the fees are lower than another lender, doesn’t mean that it is a cheaper lender all together. You need to consider the cumulative total of the components.

Finder.com.au defines a comparison rate as a rate which takes into account some of the fees and charges of a home loan to give you a more accurate representation of a loan’s interest rate once the costs are taken into account. To be truly comparable, Lender A and Lender B would advertise their rates as including X Y and Z on the same amount. If one of the rates only included X and Y then it would not be a comparison rate because you wouldn’t be able to accurately compare the cost of borrowing. A comparison rate will also provide information on the repayment term and frequency, so if the rates are calculated on a fortnightly basis you can accurately analyse your costs, but if the rate for Lender A is calculate weekly and the rate for Lender B is calculated monthly then that is not a comparison rate.

Comparison rates are typically used by lenders in advertising because the Financial regular in Australia, ASIC, requires that lenders are transparent about all their rates. Comparison rates were introduced because some Australian lenders weren’t being completely transparent about the true cost of borrowing which meant that people were misinformed and unable to accurately compare lenders.

That said, some lenders will advertise interest rates rather than comparison rates. An interest rate is purely the percentage that you will borrow at. It does not include extra fees and charges and therefore it is not a true comparison rate. Some borrowers also fall into the trap of only calculating interest rates which doesn’t give them a true reflection of what their home loan will cost them, so they could be making decisions that aren’t the best for their particular situation.

If at any time you’d like some advice surrounding comparison rates then give our expert team a call and we’ll be happy to assist

No Comments

Post A Comment