Why you need to consider interest rate and Comparison Rate?

Most people who are in the process of either getting pre approval for a home loan or those that have already been formally approved understand the concept of interest rates and the impact that this will have on their overall costs over their Home Loan term. Here is a common question that we’ve been asked frequently; ‘what is the difference between the interest rate and Comparison Rate’?
An interest rate is a simple calculation that determines the percentage of the total value of the loan that will be payable by you, in order to access the capital you need to purchase your property. Whilst, s rate can fluctuate over time depending on the RBA’s interest rates and the lending institution’s borrowing cost from foreign lenders, the method to calculate this rate is quite straight forward.
The Comparison Rate on the other hand, is the true percentage that represents the total cost of the loan, including all fees & charges including Lender’s Mortgage Insurance (LMI) that is required to be paid over the course of the loan.
However, the Comparison Rate is not quite as straightforward, due to different factors that need to be considered when it comes to calculating the true rate of your home loan product.

Interest rate VS Comparison Rate

Your home loan interest rate is a percentage that represents the amount of additional money you will repay on top of your principal each year for the outstanding balance of your loan. The rate can be variable or fixed and is generally calculated at a daily, weekly or monthly frequency. Regardless of how much you borrow, or how long you borrow it for, the rate is an easy way to determine how much additional money you should pay in order to get access to required funds.
The Comparison Rate on the other hand, is a broader calculation as a percentage, which includes all of the monthly fees, annual fees, payment terms, late fees or early exit fees, that come with a particular lending product. In Australia, any advertisements which include the annual percentage rate applicable to a loan, must also include a comparison rate. The comparison rate must be displayed with the same prominence as the interest rate.

Why you need to consider both numbers?

Most consumers are using the Interest Rates as their way of comparing different lenders and products. However, the Comparison Rates provide more comprehensive representation of the true cost of the loan and therefore should be prioritised over interest rate alone, when it comes to making a final decision on which product is right for you.

We understand this can be complex for consumers to figure out. That’s why, our team of experienced lending consultants are able to easily calculate and compare between 100s of different products in the market. We can identify the suitable products that would cost you less & will present these products to you as your home loan options for your perusal.

If you need assistance with the calculation of your current loan or would like help to configure the true comparison of your options, then reach out to one of our experts today.