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Home loan rates in Australia have been low for some time. Presently, if you are paying anything more than a figure with a 3 in front of it, there are chances you can find a more competitive deal in the market, potentially saving you thousands of dollars in the long run.

 
Understanding the comparison rate
 

But, wait. Is it okay to judge a book by its cover? Or, well, a home loan by the interest rate charged on it?

The answer, as you can guess, is a big NO. To avoid paying more of your hard-earned money in interest than necessary, you must understand the fees and features associated with a home loan before choosing one.


Comparison rate and why is it important?

Going by conventional wisdom, the best way to choose a home loan is by comparing rates on various home loan products. However, merely comparing interest rates could be misleading. For example, Bank X might charge only 3.15 percent on a home loan product. However, once you add the costs associated with setting up the loan, such as loan approval fee and other up-front and ongoing costs, you would realise you end up paying much more than you initially thought over the life of the loan.

It is, therefore, advisable to use the comparison rate to get an idea of the true cost of a home loan. The reason?

Comparison rate combines the total cost of a loan, including the interest and fees, and expresses it as a percentage. The rate is modelled upon a $150,000 loan with a term of 25 years. Thus, by using the comparison rate, not only can you estimate the true cost of a loan but also compare apples with apples while shopping for a home loan.

Did you know that all lenders in Australia must display the comparison rate in addition to the interest rate? However, lenders must also post a warning that states the comparison rate is true only for the examples given. Different terms, fees or other loan amounts might result in a different comparison rate. You can use this comparison rate calculator to crunch the numbers yourself.


The truth about comparison rate

Comparison rate is also known as the true rate because it includes all the fees and charges associated with a home loan over its term. However, there are circumstances when this might not be relevant.

Jason, a HashChing mortgage broker, explains that, “The comparison rate adds all the expected banks fees/costs to a loan amount of $150,000 and gives the equivalent rate for a loan with those fees over 25 years. It is important because a high comparison rate means there are a lot of fees. You do have to take it with a grain of salt though, because the fees are typically fixed and while fees can be a significant % for a small loan (like $150,000), on large loans they start to make very little difference, and it is the actual rate that is more important.”

Here are a few reasons why you need to look beyond the comparison rate while shopping for a home loan:

  • Comparison rate is calculated for a loan size of $150,000 borrowed for 25 years. In practice, the average loan size is much larger, and most mortgages are repaid or refinanced every five years!
  • At times, the comparison rate does not include the additional fees for extra features, such as an offset account, in your home loan.
  • In the case of fixed rate loans, the comparison rate is calculated assuming you would revert to the standard variable rate at the end of the fixed period. Most home borrowers, however, choose to refinance at the end of the fixed period, potentially to a lower rate offered by another lender.

In short, comparison rates emphasise the effect of fixed fees on a home loan that does not change with the size of the loan and (at times) the features you opt for. According to experts, comparison rates must only be used as a guide.

Instead of the lowest comparison rate, you must choose a home loan that is tailored to your financial requirements. For example, if you want to pay your home loan faster, you would want the option of making additional repayments towards your home loan. You might also want the option to redraw the extra money you have pumped into your mortgage in the case of an emergency. (Read about the essential features you need in your home loan, here.)

In the end, there is no denying that a properly structured home loan with the right features could save you hundreds of dollars each month. If you are planning to buy a house or refinance an existing mortgage, a mortgage broker could guide you to the best home loan for your situation. Speak to an expert, here.

HashChing is a borrower-friendly online mortgage marketplace that helps you own your home sooner through more choice and savings on home loans. Start by comparing hundreds of broker pre-negotiated home loan deals here.

 

By Vidhu Bajaj,
HashChing Content Writer

 

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HashChing is helping Australians by providing access to the pre-negotiated home loan deals. Obligation free consultation with one of our partner brokers might save you time, hassle and money.

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