How often do you see an incredibly low advertised mortgage rate and bother to look at the fine print next to it?
Interest rates on home loans in Australia are at an all time low and the banks are offering deals which seem too good to be true – especially when you consider what you (and your parents) were paying a few years ago. In any case, you can see why many Aussies are struggling to achieve the dream of owning their own home and get into the market.
But is every low interest rate home loan as good a deal as it looks?
As we all know, appearances can be deceptive. While most borrowers are happy with comparing interest rate against other interest rates in the current market, it is important to understand that the “comparison rate” will help you make a well-informed decision.
What is a comparison rate?
A comparison rate, by definition, is a rate that all the lenders must, by law, display next to their advertised interest rates. It’s takes into account fees and other charges of the home loan to give you a more accurate representation of a loan’s interest rate once the costs are taken into account or, to put it in layman’s terms, how much the loan is actually going to cost you..
For more information on fees you may be charged, check out my blog on Fees for Finance.
How to calculate a mortgage’s comparison rate?
Comparison rate takes into account not only the interest rate of the home loan but the amount, term and repayment schedule of the loan as well as any fees and charges associated with said loan.
Thus, comparing two loans on the basis of their comparison rate will provide a much clearer picture – comparing apples with apples – rather than comparing monthly repayments for the loans.
Comparison rates are generally calculated using a loan amount of $150,000 over 25 years. However, keep in mind that this figure will be different than your actual loan amount.
Red Tick Home Loans can help you work out the amount you can save over the specified loan term in a one on one appointment with you. Contact us today.
How does a comparison rate work?
Lenders are mandated by law to display the comparison rate while advertising their mortgage rates to ensure customers are not being misled.
If you base your mortgage comparison only on interest rates, you may end up paying much more than you thought to the lender; however, basing your mortgage rate comparison on the actual comparison rates you will find a better deal for you on your home loan.
Let’s look at Bank A, shall we?
Bank A advertises a low variable interest rate of 3.64% with a comparison rate of 4.87% (loan amount of $500,000 over 30 year term).
While 3.64% may seem extremely enticing, the comparison rate example of 4.87% gives an estimate of the real cost of the loan. The rate of 4.87% includes fees and charges incurred by you on top of your monthly mortgage repayment.
Again, it is important for you to understand what you need out of a loan and factor this in to your thinking.
Comparison rates take into account the rate as well as any fees and charges for your home loan. Some lenders charge you annual fees for premium products such as an offset – you may be able to avoid this by simply using a redraw account which is not a premium product.
Contact Red Tick Home Loans to find out more about the features and benefits you are looking for in your home loan.
Finally, in order to find the best home loan for you, follow these few simple steps:
- Take into account the home loan features –
What do you want out of your mortgage? Are there features you want with your mortgage from your lender? i.e. an offset account linked to your home loan or the ability to make additional repayments and redraws free of cost.
The comparison rate is not your only deciding factor but allows you to look at the deal as a whole and compare “apples with apples”.
- Fixed or variable home loan –
It is important to understand the difference between a fixed and a variable home loan to decide what fits your goals and lifestyle.
Read the blog I posted about Fixed vs Variable Home Loans to help you decide.
- Use a mortgage expert like Carl from Red Tick Home Loans
A mortgage broker can help you choose mortgage options best suited to you and your goals. Whether you are low on a home loan deposit and looking for a guarantor loan or you are eligible for a professional package, a mortgage broker can help you find the most suitable home loan for you – and at the best price.
It’s important that when you speak to your broker, you have some questions ready to ask them so you’re prepared. Check out my blog for some common questions for your broker.
- Research –
Research online for a loan product that best fits your criterion and compare rates online to shortlist suitable home loans.
Talk to your friends and family – they can share their opinions and experiences to help you understand what you may or may not want to do.