Note: This post has been completely rewritten as of 28 November 2016.
Interest rates on home loans in Australia are at all time low, and banks are offering deals that seem too good to be true. Home buyers, thus, are scampering to quickly make a kill – Owning a property and saving on your home loan, now that’s utopia for every Australian.
But is every low-interest rate home loan as good a deal as it looks?
As ancient wisdom goes, appearances can really be deceptive. While most borrowers content themselves with an interest rate comparison, it is an understanding that the comparison rate will help you make a well-informed decision.
What is a home loan comparison rate?
How often do you see an unbelievingly low lender advertised mortgage rate, and bother to look at the fine print next to it, before falling for the façade?
The comparison rate is a rate that all lenders are now mandated by law to disclose, to give a better idea of the true cost of the loan. Comparison rate takes into account fees and other expenses, giving the borrower a better overview of how much the loan is actually going to cost over its life.
How to calculate mortgage comparison rate?
Comparison rate takes into account not only the interest rate of the loan but the amount, term and repayment schedule of the loan as well as associated fees and expenses. Thus, comparing two loans on the basis of comparison rate will provide a clear picture than simply comparing monthly repayments for the loans.
Comparison rates are generally calculated using a loan amount of $150,000 over 25 years. However, keep in mind that this figure will be different for your actual loan amount.
The comparison rate is calculated on a standard loan amount of $150,000 over 25 years illustrating the true cost of the loan to the borrower. To get a better estimate, it is a good idea to look for a comparison rate for a loan amount and term closest to your home loan. A comparison rate calculator can help you calculate this number.
How does comparison rate work?
Lenders are legally obliged to display the comparison rate while advertising mortgage rates, to prevent customers from being misled. The overall comparison rate takes into account the fees and charges applicable on the loan in addition to the interest rate, expressed as a percentage to reveal the true cost of the loan. If you base your mortgage comparison only on interest rates, you may end up paying much more than you thought; however, basing your mortgage rate comparison on comparison rates will help you land a better home loan deal.
For example, a lender may advertise as follows: Low variable interest rate 3.45%, comparison rate 5.25% (basis loan of $150,000 for 25 years).
While 3.45% may seem extremely lucrative, the comparison rate example of 5.25% gives an estimate of the real cost of the loan. However, borrowers must not blindly compare loans only on the basis of comparison rates. It is important to take into account other home loan features as well.
In order to find the best home loan deal, follow these simple tips:
1. Take into account the home loan features – Do you need an offset account linked to your home loan or the facility to make additional repayments and redraws free of cost? The comparison rate must not be the only factor driving your decision, but your financial vision.
2. Fixed or variable home loan – It is important to understand the difference between fixed and variable home loan rates to decide what fits in your financial condition best.
3. Use an expert – A mortgage broker can help you choose mortgage options best suited for your condition. Whether you are low on home loan deposit and looking for a guarantor loan or eligible for a professional package, a mortgage broker can help you find most suitable home loan deals in the market.
4. Research – Research online for a loan product that best fit your criterion and compare mortgage rates online to shortlist suitable home loans. HashChing lets you compare broker pre-negotiated lowest home loan rates and assists users with home loan queries through expert advice from verified mortgage brokers online, free of cost.
By Vidhu Bajaj