Borrowers looking for a low interest rate need to pay just as much attention to the comparison rate on the loan to determine if the loan is as good as it seems.
As rates continue to move and competition hots up in the mortgage market, borrowers hunting around for the best standard variable rate need to also check the comparison rate because it will give them a better indication of the loan’s true cost.
As an increasingly greater range of products jostle for a borrower’s attention in the standard variable rate space, borrowers should be aware that some of the newer products on the market do have high comparison rates associated with them and should be more closely scrutinised for that reason.
Since it has been some time since rates were last rising, it is likely that consumers have become a little complacent about the value of the comparison rate in relation to what it can tell them about a loan – so now is the ideal time to ensure they don’t make a mistake by not considering it in the course of their loan research.
By looking at the comparison rate schedule which factors in the financial effect of the compulsory fees and charges over the term of your loan, it could very well make the perceived savings on a low rate negligible – even within the first year.
A general rule of thumb: a comparison rate of around .05 to .10% above the annual percentage rate is a reasonable figure, however when a comparison rate starts to hover more than .25 to .50% above that annual percentage rate, it requires more detailed investigation into the loan costs that are contributing to that higher rate.
Lenders are legally required to provide borrowers with a comparison rate schedule with their loan documentation, as well as including the comparison rate on advertisements and other marketing material so that borrowers can more easily compare one loan against another.
If the comparison rate is not easily apparent, ask the lending representative where you can find that information in the material you have been given.
Now that we are in a rising rate market, a higher comparison rate can have a significantly greater effect on the hip pocket for borrowers, so it’s important to familiarise yourself with its vital role sooner rather than later, if you weren’t already using it during your loan search.
Borrowers should note however that although ongoing loan fees and charges are part of the comparison rate, there may be other costs that are not included because they are dependent on whether or not an event occurs, such as early repayment or redraw fees.
It’s also important to put the comparison rates into context if you are doing a cost versus benefit analysis on how the loan is structured and what each feature is actually costing you.
For example, certain loan features such as flexible repayment arrangements and fee free banking may save you more than they cost – so you need to consider how valuable those loan features and the service that goes with them are to you when weighing up your decision.
Tags: Comparison rate, Fixed Rate, Home Loan, Home Loans, Interest Rates, Lender, rate rise, Variable loan, variable rate