How to Use Comparison Rates to Find the Best Home Loan
When it comes to finding the best home loan, many borrowers focus on the interest rate. However, the interest rate alone doesn’t provide a complete picture of the loan’s cost. This is where the comparison rate comes into play. A comparison rate includes the interest rate plus most fees and charges, giving you a clearer idea of the loan’s true cost. This comprehensive guide will help you understand how to use comparison rates effectively to find the best home loan.
Understanding Comparison Rates
A comparison rate is a tool designed to help borrowers compare the true cost of different loans. It combines the interest rate with most of the fees and charges that apply over the life of the loan, expressed as a single percentage. This makes it easier to compare loans on a like-for-like basis.
What Does a Comparison Rate Include?
The comparison rate includes:
- The interest rate
- Application fees
- Ongoing fees
- Settlement fees
- Discharge fees
However, it typically excludes:
- Government charges (e.g., stamp duty)
- Fees for optional features (e.g., offset accounts)
- Late payment fees
Why Comparison Rates Are Important
Comparison rates are crucial because they provide a more accurate representation of the loan’s overall cost. A loan with a low interest rate but high fees might end up being more expensive than a loan with a slightly higher interest rate but lower fees. The comparison rate helps you see beyond the headline interest rate and understand the true cost of the loan.
How to Use Comparison Rates
1. Look Beyond the Interest Rate
While the interest rate is important, it doesn’t tell the whole story. Always check the comparison rate to understand the true cost of the loan. For example, a loan with a 3.5% interest rate but a 4.0% comparison rate might be more expensive than a loan with a 3.8% interest rate and a 3.9% comparison rate.
2. Consider Your Loan Amount and Term
Comparison rates are usually calculated based on a standard loan amount and term (e.g., $150,000 over 25 years). If your loan amount or term is different, the comparison rate might not be as accurate for your situation. Use it as a guide, but also consider your specific circumstances.
3. Use Comparison Rates to Narrow Down Your Options
Start by looking at the comparison rates of different loans to narrow down your options. Once you have a shortlist, you can delve deeper into the details of each loan, such as additional features and flexibility.
4. Check for Additional Features
Some loans with higher comparison rates might offer features that could save you money in the long run, such as:
- Offset accounts: These can reduce the amount of interest you pay.
- Redraw facilities: Allow you to access extra repayments if needed.
- Flexible repayment options: Enable you to make extra repayments without penalties.
Case Study: Comparing Two Loans
Let’s compare two hypothetical loans to illustrate how comparison rates can help you make a better decision.
Loan A:
- Interest rate: 3.5%
- Comparison rate: 3.8%
- Features: Basic loan with no offset account or redraw facility
- Fees: $395 annual fee
Loan B:
- Interest rate: 3.8%
- Comparison rate: 3.9%
- Features: Offset account, free redraw facility, ability to make extra repayments
- Fees: $10 monthly fee
For a $500,000 loan over 30 years:
- Loan A: Monthly repayment of $2,245, total cost over 30 years of $808,200
- Loan B: Monthly repayment of $2,287, total cost over 30 years of $823,320
While Loan A appears cheaper based on the interest rate, Loan B offers features that could save you money in the long run, such as the offset account and the ability to make extra repayments.
Tips for Using Comparison Rates Effectively
- Read the Fine Print: Always check what fees are included in the comparison rate and what are not.
- Use Online Calculators: Many financial websites offer calculators that can help you estimate the true cost of a loan based on your specific circumstances.
- Consult a Mortgage Broker: A broker can provide personalised advice and help you find a loan that suits your needs.
Comparison rates are a valuable tool for finding the best home loan, but they are not the only factor to consider. By understanding how comparison rates work and using them effectively, you can make a more informed decision and potentially save thousands of dollars over the life of your loan. Remember to consider your personal circumstances, the loan’s features, and seek professional advice if needed.