The comparison rate calculator is designed to let you easily compare the true cost of one loan versus another from the same lender and loans from different lenders.
The comparison rate is calculated by combining the loan’s interest rate, the monthly repayment amount, upfront costs and any additional fees and charges associated with taking out the relevant loan.
It is shown as a single percentage of the amount being borrowed.
What is a home loan comparison rate?
A home loan comparison rate is a percentage rate that represents a closer estimate of the total cost of the loan per year. It helps potential borrowers identify the true cost of each loan they are considering, so that they can make considered decisions in full knowledge of true costs, as distinct from decisions based just on the advertised interest rates which may prove detrimental over time.
Sometimes referred to as the average annual percentage rate (AAPR), the comparison rate also considers loans with a lower introductory rate that revert to a different interest rate after a set period.
Under the National Consumer Credit Protection Regulations (NCCPR), the comparison rate calculation includes the following:
- Loan amount of $150,000
- Loan term of 25 years
- Repayment frequency
- Interest rate
- Monthly account fee (if any)
- Annual fee (if any)
- Establishment fee (if any)
- Valuation fee (if any)
- Mortgage documentation fee (if any)
- Settlement fee
The comparison rate doesn’t include any Government fees such as stamp duty.
How accurate is the home loan comparison rate?
A home loan comparison rate will provide you with a guide as to whether one home loan option is likely to have higher fees and charges than another loan under consideration, but it is unlikely in most instances, to provide you with a 100% accurate picture of total loan costs.
The reasons for this are that the assumptions used by the calculator, will probably not be a straight match for your circumstances. This is a consequence of the values it uses for home loan amounts, and the fact that the impact of additional fees and charges are smaller against total costs when compared to the interest rate, when larger borrowings are involved.
You also need to understand that a home loan comparison rate doesn’t normally include every cost associated with taking out a home loan, given that certain mortgages have non-standard charges that are not always utilised, such as early repayment fees or redraw fees.
Also because a home loan comparison rate doesn’t take into account some of the extra features and benefits, such as an offset facility, available as part of certain home loans, you will need to exercise a judgement call as to whether or not the extra costs represents good value for you.