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What are Comparison Rates?

05th Dec 2018

When you are researching home loans you will always see the lenders actual interest rate followed by what is called a ‘comparison rate’. Why is there a comparison rate? What is a comparison rate? And more importantly how does it help you?

Several years ago the federal government thought that it was a great idea to make lenders disclose not only the actual rate that they were charging, but also what their effective (or the true cost of a loan) interest rate is. This was done to allow consumers to understand more fully what a loan would cost, and how the various lender offers compared to each other – therefore a ‘comparison rate’

The issue is that when you see an advertised rate / comparison rate it is based on one single scenario – usually a loan of $150,000 over a term of 25 years.  So, if your loan does not match that scenario the comparison rate is not correct for your circumstances. Your actual comparison rate may be higher or lower. A loan that seems cheaper may well not be when your individual requirements are assessed.

To check your own scenario you need to log into the lenders website and find a ‘Home Loan Key Fact Sheet’, having found this you can enter your own loan details and get a more accurate personalised comparison rate.  Now we are back where we were many years ago – when you look at a lenders scenario rate you may discount that lender from your shortlist, only to miss out of a great deal that matches your own circumstances.

The comparison rate is also skewed by how individual lenders interpret the rules.  Lender A for example may include every possible fee or charge (even though you may never actually pay them), while Lender B will leave some out (because you may never pay them) – so the comparison rate is out again.

Let’s explore getting that home loan. You have worked out how much you need and have decided what loan term you want.  Time to hit the web and look at all the lenders that you can think of.  OK, do you want a fixed rate or a variable rate, what about those super special rates for the first couple of years? Better write them all down.  Now let’s find the key fact sheet and compare all the options from the first lender, there goes an hour of your life.

Moving right along time to look at the second lender that comes to mind and do the same thing, “oh shoot, they’re special offer is different to the first one, have to add another loan to the mix”, off to the key fact sheet, compare the options and……there goes another hour.

Time for lender 3…..uh oh, their special is different to lender 1 and lender 2, add another column, compare them all, find the key fact sheet, run them out one by one again.

Confused? Well, have fun, there’s only about 200 or 300 lenders offering home loans in Australia – each with up to 10 different loan options. This won’t take long or be very painful at all. Right about now you may be getting fond memories of your last trip to the dentist.

There is a better way...

Now imagine a world where you can talk to a finance specialist that can assess your borrowing options, talk through the things that are important to you and short list the type of loan that matches your personal requirements.

Imagine a world where you can then ask that lending specialist to compare a range of lenders for you and have an accurate answer in minutes.  Does that sound too good to be true?

Well, in a universe far, far away there is just such a thing – a lending specialist that is not only highly trained and experienced, but also comes equipped with specialist software to be able to poke and prod a range of lenders to get this information in minutes.  Even better that lending specialist can then do the loan application for you, negotiate with the lender and take care of all that stuff while you shoot down and enjoy your smashed avocado and latte.

Remember as well, while some lending specialists boast that they can compare loans from 20 or so lenders, at Regional Finance Solutions we can compare up to 60 for you. A little challenge, before you come see us see if you can even think of 60 lenders, if you can name them all we’ll give you a prize!

The serious bit

Buying a house is exciting and stressful.  There are lots of tricks and trips to getting the right home loan; the best and easiest way to get that elusive great deal is to talk to a mortgage professional. And we know just the one – call us on 1800 734 346 and we’ll tell you their name and connect you.