What is a comparison rate?

A recent ME bank survey found that 74% of Australian’s don’t know what a comparison rate is.

I used to think a comparison rate was the “true cost” of your home loan. Point blank. Uhh”¦ not so much. Because sadly, it’s not that easy.

A comparison rate typically shows you the cost of a $150,000 loan over 25 years if you add back in the bank fees you’ll pay (note not your government charges or lender’s mortgage insurance, things like up front costs to the bank and any monthly or annual charges) and make the minimum repayments over that period of time.

Which is awesome”¦ if you have a $150,000 loan that you pay out in exactly 25 years that you want to compare bank for bank. But – if you have a $500,000 loan, or want to pay your loan out in 15 years then it’s not a direct comparison.

The smaller the loan size the great influence fees such as set up and annual fees will have over the true interest rate that a comparison rate is trying to indicate to you.

In short, it’s a guide only and to get a proper comparison that’s right for you – have your broker compare the true cost of the loan you’re looking at with other products. They’ve got access to sophisticated software that will compare for your correct loan amount – and they can amend loan term to suit.

–       Kirsty