What is a Comparison Rate?

Are you considering refinancing to find a better rate?

There are several factors to consider when refinancing your mortgage.  Should you speak with your current lender?  Should you fix your interest rate or do a split loan? Will it be a hassle with payroll and bills if I re-finance?  Other options such as ‘honeymoon rates’ and ‘introduction rates’ are also important considerations.  However, what I consider to be one of the most important factors is understanding the relationship between the advertised headline interest rate and the ‘comparison rate’.

What is a Comparison rate?

The comparison rate is the rate that all lenders by law must display next to their advertised or headline interest rates. A comparison rate is designed to help clarify the overall cost of a loan based on several relevant factors, rather than just the interest rate. Each comparison rate accounts for the following:

• amount of the loan
• loan term
• repayment frequency
• interest rate
• fees and charges

Why pay attention to comparison rates?

The loan with the lowest interest rate is not always the cheapest option! For instance, a loan with a low interest rate but high fees and charges may have a higher comparison rate than a loan with a higher interest rate but low fees and charges. That is, you may end up paying thousands of dollars more for the loan with the lower interest rate.

When researching products offered by different providers, you can use the respective comparison rates as a more accurate indication of loan cost than you would otherwise get by only comparing interest rates.

Comparison rate example

For example – below are actual rates and comparison rates currently on offer. Both are calculated on $400,000 borrowed over 30 years at a standard variable.

• Lender A: Headline rate 2.43% Comparison rate 2.46% = monthly payment of $1572.00

• Lender B: Headline rate 2.39% Comparison rate 2.55% = monthly payment of $1591.00

On the face of it, it does not appear to be a big difference as both lenders are competitive but over thirty years ‘lender A’ saves almost $7000.00 even though their headline rate is higher.

Things to keep in mind….

Remember that when you look at comparison rates, the loan amount and terms only cover one possible scenario.  The comparison rate may not be an accurate reflection of your individual loan requirements. The loan amount and terms that a comparison rate is based on will be in the fine print. 

At AAA Mortgage Broking we clearly compare the most suitable lenders for you to help determine the best possible package. For most of us it is all about the bottom line. We want to know how much our mortgage repayments will be and we want the lowest repayment possible!

While comparison rates can be a good starting point, they are not the only thing to consider when shopping around for a loan. It is also important to compare the other features of the loan to see if it works for you.

Other features to consider

Each lending institution offers many products with just as many variations. To help determine which of those is most suitable, we will take the time to listen to you and then determine how the following, or a combination, can best be tailored to benefit you.

• Fixed or Variable loans
• Home Equity loans
• Line of Credit 
• Family Pledge 
• Offset accounts Vs Redraw.
• Line of Credit
• Lenders Mortgage Insurance.

My primary goal is to help you achieve your financial goals by reducing the ‘Noise’ in the mortgage market and to help navigate through which is the best option if you are considering any the following.

• Residential Home PPR  
• Investment Property
• Pre-Approved Finance
• Re-financing
• Construction Loans
• Professional Loan Products 
• Lo-doc loans for Self Employed

How AAA Mortgage Broking can save you time and money

AAA Mortgage Broking has access to over 30 lenders. This is where a mortgage broker sets themselves apart from each individual bank or lender. We compare each of our 30 lenders to find the best deal for you. An individual bank can only work with their own products and do not compare themselves against other lenders in the market. Having a AAA mortgage broker in your corner will save you time and money. At AAA Mortgage Broking, we take the time to listen and help you navigate the mortgage market to secure the best outcome for YOU!

Interest rates continue to remain at all-time lows, so if you would like a no obligation mortgage health check, please call John today on 0403 092 282.