A comparison is the true cost of a loan every year, including fees and charges, and taking the product attributes into account. While an interest rate may be low to lure you into that product, the comparison rate provides a more realistic understanding of the cost of a loan, and allows you to more easily compare one loan against another. It is required by law that the comparison rate always accompany an interest rate and it is incumbent upon mortgage brokers to discuss these comparison rates with you.
Part 10 of the National Consumer Credit Protection Act 2009 includes the relevant legislation governing the inclusion of the comparison rate in all consumer-facing material.
How is a Comparison Rate Calculated?
The factors or attributes that impact upon a comparison rate include, but are not limited to the following: Upfront Fees, Ongoing fees, and Discharge fees. Fees that contribute towards the comparison rate include the following:
- Amount of the loan
- Loan term
- Repayment frequency
- Interest rate
- Monthly account fee
- Annual fee
- Establishment fee
- Valuation fee
- Mortgage documentation fee
- Settlement fee
Why are Comparison Rates Important?
The loan with the lowest interest rate isn’t always the cheapest option. When researching products offered by different providers, you may compare the the respective comparison rates as a more accurate and realistic indication of true cost of each loan.
Some banks will advertise a low interest rate but incur high fees and charges, while a slightly higher rate may have lower fees, making the latter product a better option. One of our brokers has the tools necessary to match you with an appropriate product based on your individual circumstances and it isn’t uncommon to be paired with a product that outwardly appears more expensive when in reality it is a much more appropriate option.
Comparison Rates Can Also Be Deceptive
Comparison rates are normally calculated on a $150,000 secured loan, over a 25-year term, although each product will usually include its own comparison data. The problem with arbitrary benchmark is this your loan will usually exceed $150,000 (the average loan is over $500,000) and with sound debt minimisation strategies your loan will usually be paid off in less than 25 years. The comparison rate doesn’t take your variance in circumstances into account, and nor does it consider how your product is structured.
A comparison rate does not include all fees and charges. For example, the comparison rate does not include:
- Government fees and charges
- Break costs or early termination fees
- Late payment fees
- Government stamp duty
- Conveyancing fees
- Deferred establishment fees
- Redraw fees
Additionally, a comparison rate may not reflect the full cost of your loan if you choose to use optional features that attract extra fees.
The comparison rate only allows comparison based on cost, and will not include other factors that may make a loan more attractive, such as access to fee-free accounts or flexible repayment arrangements.
A Graphical Illustration of Interest and Comparison Rates
The graph below shows a number of products from a range of banks (not necessarily banks that we have on our panel). The purpose of the graph is simply to illustrate how the lowest published rates don’t necessarily equate the to the lower or more appropriate comparison rate (o be fair we’ve sourced all the products with the lowest and current interest rates made available to the market).
You’ll note that the published rates might appear fairly consistent and ‘flat’ as this is a figure the banks might often use to appeal to customers and compete against each other (particularly those that make the mistake of walking into a branch), but it doesn’t necessarily represent the true rate provided by the product (as illustrated by the comparison rate line in orange).
We use advanced software, and fall back on our years of experience, to filter the lender’s products into a manner that will make more sense to you.
Average Borrowing Rates
The Australian Prudential Regulation Authority (APRA) reports aggregated or ‘average’ rate data to the RBA every quarter, and the data is a reasonable indication of what rate the average borrower is paying. The graph below shows rates for Owner Occupied Principal and Interest (OO PI), Existing Owner Occupied PI (Existing OO PI), and Investment Principal and Interest (Investment PI), with the rates measured against the current cash rate.
It’s worth noting that the average existing lending rates are higher than the current available rate suggesting there’s a clear advantage in regularly refinancing or haggling your bank for a better rate. The data also shows us that many are not borrowing at the lowest rates that are actually published.
We’ll obviously make sense of all this data for you and present you with options that best fit your circumstances.