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What are comparison rates?

Comparing apples to oranges never makes sense!


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And that is exactly why comparison rates exist - to make finding the right home loan easier and to make advertised rates as transparent as possible!


So this is what happens usually.


You are looking for the best home loan deal and you see a bank's ad on your daily Facebook scroll. It shout's 2.34% INTEREST! and underneath that seemingly too-good-to-be-true rate it says - 3.55% comparison rate.


Okay cool.. so what does it mean? Check out the below equation and join me further down the page!




Because a comparison rate includes all the fees and charges that can be applied to a home loan, it helps to show customers what the true cost of a loan is. In some instances, lenders offering the lowest rate may not actually boast the cheapest loan, which is what a comparison rate shows.


Banks and lenders are required to publish a comparison rate to protect consumers and prevent them being misled when it comes to home loan interest rates.


A comparison rate allows consumers to compare apples with apples, to an extent.


It does make it much simpler to hold two loan products side by side and, regardless of whether one has a slightly higher interest rate and no fees, while the other is a super-low interest rate with high fees, see at a glance, which one is the better deal financially.


However, it isn’t always this simple.


Fees and charges, the rate at which principle is paid down, and the total interest paid over the loan term, all change depending on the loan amount and term, so you need to delve a little further into how that comparison rate is calculated.


While the comparison rate itself must be as prominently displayed as the interest rate somewhere on the advertisement, there will be a statement along the lines of ‘Comparison rate calculated on a loan of $150,000 for a term of 25 years, with monthly repayments’.


Keep in mind that if your loan is going to be for $900,000 the comparison rate for your loan will be vastly different!


In order to get an idea of the comparison rate that applies to a loan, it is a good idea for borrowers to work with a broker to look at the comparison rate for the amount and term closest to the amount and term of their loan.


 

At Rockstar Finance, we have helped more than one hundred homeowners with their home loans and all the while, ensuring that our clients understand the comparison rate that applies to their individual circumstances.

If you want to get an idea of your current comparison rate, contact Rockstar Finance today for a free discussion so that we can help you determine if your current or future home loan is suitable for your needs.