Comparison Rate vs Interest Rate: What’s the difference?
If you’re in the market for a home loan, you may have noticed lenders advertising an interest rate vs comparison rate. If so, you’re probably wondering what are comparison rates and is there a difference between interest rate and comparison rate?
If so, you’re certainly not alone! In fact, “what is the difference between interest rate and comparison rate?” is a question that mortgage brokers get asked all the time!
And while the whole ‘comparison rate vs interest rate’ equation may look confusing, it’s actually quite simple.
What is a Comparison Rate?
When looking for a new home loan, it can be tempting to just compare interest rates. But this won’t give you an accurate assessment of which loan will offer the best value long term.
A loan with a lower interest rate may include higher fees. This is why it’s a good idea to pay attention to the comparison rate vs interest rate.
A mortgage comparison rate is a rate that all lenders, by law, must display next to their advertised interest rates. It is designed to help you understand the overall cost of a loan and make it easier to compare loans from different lenders.
How does a mortgage comparison rate do this?
Unlike an advertised interest rate, comparison rates factor in some of the additional fees and charges that come with a home loan.
So, comparing interest rate vs comparison rate will give you a more accurate representation of how much you can expect to pay once these additional costs have been included.
What is the Difference Between Interest Rate and Comparison Rate?
The difference between an interest rate and comparison rate can be found in the included costs.
A home loan interest rate only reflects how much interest you will be charged per year on the balance of your loan (which establishes how much your monthly repayments will be).
The mortgage comparison rate, on the other hand, compares the overall cost per year of the loan, including most of the fees and charges that may crop up at the start of the loan or throughout the year (such as annual fees).
- What are interest rates? Interest rates show how much interest the lender will charge you per year. This rate will determine your monthly repayments.
- What are comparison rates? Comparison rates show how much you’ll be charged by the lender per year, including most standard fees and charges. This helps to determine your total mortgage costs over the course of a year.
Understanding the comparison rate meaning will help you to make a more accurate comparison between different home loan products.
This is what the rates will look like when you’re exploring lenders’ options:
What is Included in a Mortgage Comparison Rate?
When comparing the comparison rate in a home loan it’s important to first understand what costs are factored into the rate. Typically, the comparison rate will include the:
- Amount of the loan
- Loan term
- Repayment frequency
- Interest rate
- Fees and charges (including establishment fees and annual costs)
What Does a Comparison Rate Not Include?
A comparison rate is designed to help consumers make an “apple for apples” comparison among home loan products.
So, while it can be a useful tool, it’s important to view it as a guide only. This is because the comparison rate won’t necessarily include all associated loan costs, such as:
- Government charges, such as stamp duty or mortgage registration fees.
- Fees and charges associated with loan options or events that may or may not be used by the borrower, such as early repayment or redraw fees.
- Fees and charges which aren’t available at the time the comparison rate is provided.
- Cost savings, such as fee waivers or the availability of interest offset arrangements that may influence the cost of a loan.
Why Pay Attention to Comparison Rate vs Interest Rate?
Understanding the comparison rate meaning can enable you to make a more informed decision as a consumer.
By looking at the comparison home loan rates, you might be surprised to see that sometimes the loan with the lowest interest rate isn’t always the cheapest option.
For example, a loan with a low-interest rate might have fees and charges involved that would actually give it a higher comparison rate.
However, while comparison home loan rates can be a good starting point, they’re not the only thing to consider when shopping around for a loan.
It’s also important to compare the other features of the loan to see if it will provide you with the best possible solution.
This is where a great mortgage broker can assist you. By comparing a wide range of loan products and offering tailored expert advice, a mortgage broker can make sure that the loan you choose suits your individual circumstances.
This could save you thousands of dollars over the life of the loan.
Comparison Rate Advice from an Experienced Mortgage Broker
Comparison rates play an important role, but they aren’t always going to deliver the best possible loan product to suit your circumstances.
For example, is your Loan-to-Value Ratio (LVR) under 80%? And are you are prepared to review your home loan every 2-3 years (especially when the fixed interest rate term has ended)?
If so, the comparison rate alone (which is calculated over a 25-year loan term) may not be serving you.
North Brisbane Home Loan works hard to ensure that all of our customers are aware of the best deals available and how to get them.