What is a Comparison Rate?
11 May 2020
When it comes to choosing a loan, there are many factors which may influence your decision. One such factor is the interest rate. Understanding interest rates and other fees associated with loans can be challenging, making it difficult for you to determine whether your chosen loan meets your needs.
To help you make these decisions, the government has legislated that, in addition to displaying the advertised interest rate for a loan product, financial institutions must also display a comparison rate. The formula used to calculate the comparison rate is regulated by the Consumer Credit Code and all financial institutions must use the same method to calculate this rate.
Why is a comparison rate helpful?
The comparison rate is helpful as it gives you, the consumer, a clearer indication of the actual costs of the loan. This helps you to more easily compare loan products from different financial institutions.
What does a comparison rate include?
The comparison rate reflects the actual annual interest rate, together with the loan amount, the term of the loan and the required repayments. It also includes many of the fees and charges associated with taking out the loan. This may include things such as establishment or set up fees, annual or ongoing fees, valuation and mortgage documentation fees and settlement fees.
As well as factoring in fees and charges, a comparison rate may also be calculated using any discounted introductory rate (often called a Honeymoon rate) or in the case of a loan with a fixed rate period, it will include the revert or ‘roll out’ rate of the loan after the fixed period expires.
What is not included?
The comparison rate does not include items such as Government charges i.e. Stamp Duty or fees which may apply for optional events throughout the loan, such as redraw, loan variation fees or late payment fees.
What should I look out for?
Generally, the closer the comparison rate is to the advertised rate, the less fees and charges there are associated with the loan. A home loan with a very low advertised rate might initially look appealing, but closer inspection of the comparison rate may reveal some additional costs that might not benefit you in the long run.
We’re here to help
If you are unsure about the costs associated with a loan, always make sure to ask. For more information on our loans or assistance with applying for a loan, please speak to our friendly staff, call 1300 131 844.