Comparing apples with oranges doesn’t make sense. To make finding the right loan easier, and to make advertised rates as transparent as possible, we have comparison rates.
You’re looking for a great mortgage deal and you see an ad ‘3.8% INTEREST!’, underneath that is ‘7.9% comparison rate’. What does this mean?
What is a comparison rate? A comparison rate aims to indicate the true cost of a loan.
A comparison rate is designed to help you understand the overall cost of a loan based on several relevant factors, rather than just the interest rate.
Each comparison rate is calculated using a standard formula:
• Amount of the loan ($150,000)
• Interest rate
• Loan term (25 years)
• Repayment frequency
• Fees and charges such as Establishment, Valuation, Exit Costs, Mortgage Documentation and Settlement fees
• It also takes into account loans with a lower introductory rate that reverts to a different interest rate after a set period of time.
Why it’s important
The goal is to help you make a more accurate comparison when considering different loans. Ensuring all lenders use a standard formula comparison rate makes it much simpler to hold two loan products side by side and see at a glance, which one is the better deal financially.
Why you need to be careful
While comparison rates can be a good starting point, they’re not the only thing to consider. If your loan is going to be for $900,000, the comparison rate for your loan could be vastly different from the standard one. Loan features and benefits, short and long term goals, and product flexibility are just some of the other factors that need to be taken into account.
Comparison rates are a very handy tool. It’s important, however, to look at a rate that is specific to your circumstances. One of our friendly Finance Brokers can do exactly that for you, and also ensure your goals, lifestyle and personal circumstances are considered before taking a loan. So why not contact us today to compare?
Source: Astute Finance