A comparison rate is a tool to help consumers identify the true cost of a loan. It factors in the interest rate, fees and charges and displays a percentage rate that can be used to compare various loans from different lenders. From 1 July 2003, the Australian Government made it compulsory to display a comparison rate for any display of a credit rate – including home loans. It is seen less frequently now as there are a number of limitations in using this as a reference but it can be a good initial starting point.
The comparison rate is calculated based on the below following variables
- $150,000 loan amount
- 25 year term
- principal and interest loan
Therefore no matter how large your home loan or investment loan is and most of them are larger than $150K, any fees associated with a larger loan which in reality would be less affected by fees compared to a smaller loan distorts the actual validity of a comparison rate. Conversely if you are looking at loaning only a small amount and there are lots of fees associated with that loan, the comparison rate would be more relevant taking into consideration those fees and the actual interest rate would not be as significant as an indicator as in the larger loan scenario.
So when looking at your next mortgage, car lease, business loan, home loan, please look at other factors such as the features a loan may have, is it better to have a variable rate or to have part or all of it fixed, does the loan have an offset account and is the loan small or large enough for fees to impact the interest rate. Keep in mind you may look at refinancing options within 3 to 4 years so very few loans would actually see out a 25 year loan term. Within the term of a loan also banks will change the standard variable rate they apply their discounted rates to so a comparison rate at the start of a loan could be much different as to what it might be into the duration of a loan or mortgage.
For more information on this please call one of the lending specialists at MediPro Capital on 1300 937 007 or visit our website at www.mediprocapital.com.au