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It’s common to compare interest rates when shopping around for home loans. But did you know the comparison rate can give you a better idea of how much a loan will cost?

What is a comparison rate?

A comparison rate is a figure that accounts for the interest rate on a loan and the majority of ongoing and upfront charges that add to the borrowing costs. For example, a loan might have an interest rate of 3% and a comparison rate of 3.25%. The comparison rate informs borrowers of the actual cost of the loan by including some of the standard fees, making it easier to compare different loan products on the market. However, you must not compare loans only based on comparison rates. It’s important to take into account other home loan features as well.

If you are wondering why you should use comparison rates, consider an example where you find two home loans with the same advertised interest rate. You may think both will cost you the same, but that’s not always true. A loan with a higher comparison rate will likely cost you more due to higher fees or other charges levied by the lender. Even when Loan A charges less interest than Loan B, if the comparison rate for Loan A is higher than Loan B, it’s going to cost you more in terms of standard fees and charges. 

How is the comparison rate calculated?

The comparison rate is always calculated on a loan size of $150,000 with a term of 25 years. In addition to the interest, it includes standard fees and charges. These include:

  • Upfront fees, such as application fees and valuation fees.
  • Ongoing costs, including any monthly or yearly account keeping fee or other periodic admin charges.
  • Discharge fees.

The comparison rate also takes into calculation any introductory rate on a loan and the revert rate at the end of the introductory period. However, a comparison rate may not give you a 100% accurate representation of your home loan costs.

There are several reasons for this. Firstly, comparison rates don’t include all the costs associated with a loan. For instance, government fees and the cost of different home loan features are not included in the comparison rate.

Second, comparison rates displayed by lenders are calculated on a $150,000 home loan. However, the average home loan size in Australia is about $600,000. Generally, the larger the home loan size, the lesser the impact of fixed fees and charges on borrowing costs compared to the interest rate. 

Overall, a comparison rate can be helpful for making a quick comparison of home loan costs, but you need to evaluate other factors to make an informed decision. Here are some tips for finding the best home loan for you:

Understand the pros and cons of fixed and variable rate home loans

Recent rate hikes by the Reserve Bank of Australia (RBA) have led to higher mortgage interest rates. Experts predict a few more rate hikes in the pipeline, and interest rates are likely to rise further. In this uncertain environment, some borrowers are rushing to fix their mortgage interest rates, but they must prepare for a possible jump in repayments at the end of the fixed period on their home loans. 

Fixed home loan rates are also already higher than variable rates offered by most lenders but fixing your loan now could potentially shield you from future rate hikes for a while. On the other hand, variable rate home loans are more flexible and often come with features like an offset account that can help you save on interest. Eventually, you need to decide whether you prefer the certainty of a fixed interest rate on your mortgage or the flexibility provided by a variable interest rate.

Compare home loan features to find a suitable deal

Home loan features like an offset account linked to your mortgage or the facility to make additional repayments at any time can help you save on interest and make it easier to manage your home loan. However, you may need to pay extra for such features, and it’s worth calculating whether the potential benefits justify the additional costs. 

Do your homework and seek help from an expert

Spend time learning more about home loans and different features to find a product that meets all your requirements. A mortgage broker can help you find home loans suitable for you and even try to negotiate a better rate for you. You can also pose your home loan queries to a Hashching expert for their opinion.

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