A Comparison Rate is an interest rate which includes all ascertainable fees, interest costs, discounts and rebates. But they are trickier than you think.
These two loans have identical features, from different lenders. Which is cheaper for the average borrower?
Answer: Loan B is several thousand dollars more expensive than Loan A.
The False Impression
All rates quoted on this site are based on a term of 30 years and a loan amount of $350,000, which is around average for most new borrowers. Mandatory Comparison Rates, are not.
Changes in loan amounts or loan terms dramatically influence the reliability of Comparison Rates. It is crucial you obtain a Comparison Rate for your individual situation. For the above example:
|
25 Years
|
30 Years
|
|
|---|---|---|
|
$150,000
|
$350,000
|
|
| Loan A | 5.06% | 4.98% |
| Loan B | 5.06% | 5.06% |
Although these two loans have the same comparison rate using a term and loan amount commonly quoted for Comparison Rates, when you increase the loan term and loan amount, Loan A becomes significantly cheaper. Although the percentage may seem like a small number it will add up to thousands of dollars difference.
Lenders and brokers are not required to provide you with a Comparison Rate based on your individual situation, however you should insist on one. If they refuse, then they simply don’t want you to be able to compare them apple to apple with lenders or brokers that will.
The Comparison Rate Formula.
Only ‘Ascertainable’ costs are included
This is a loophole which affects all borrowers, but none more significantly than borrowers who required Lenders Mortgage Insurance. Whether Lenders Mortgage Insurance is payable and how much it will cost varies wildly between lenders.
By how much? Who knows. It’s not unreasonable to see variations of $5,0000+ on very ordinary loan amounts.
Does not consider features
You should always make sure the loans you are comparing have the features that you want and use. Once you have confirmed this, an individual Comparison Rate can then help you decide which is the most cost effective solution to meet your needs.
No good for Evergreen Interest Only
The Comparison Rate formula cannot be used for evergreen interest only facilities as the effective rate can only be calculated if the loan is repaid over time.
Fixed Rate Mortgage Traps
Comparison Rates can also be misleading for Fixed Rate loans as the majority of the the loan (for the purposes of calculating the Comparison Rate) is calculated at the variable rate. This means it is possible for one mortgage to have a lower fixed rate for the fixed rate period than another, yet have a higher Comparison Rate.
