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Comparison Rates
What Is A Comparison Rate?
The comparison rate was created
to give borrowers a better indication of the real cost of a
loan, it is
based on the average annual percentage rate (AAPR). For
example, a bank’s advertised interest rate may be 5.49% and
it’s comparison rate 6.75%. When assessing the cost of a
home loan, you need to consider not just the interest rate,
but other costs too, such as ongoing fees, and up-front
charges as these can vary between loans.
The comparison rate excludes government fees and charges,
because they are standard across all loans.
A comparison rate
that helps you compare loan costs is welcome given the array
of different loan types, rates and fees.
It’s also important to consider the features of a loan
rather than just the interest rate when comparing loans. No
monthly fee, repayment flexibility and money-saving features
such as 100% mortgage offset can make a huge difference to
the final cost of a loan.
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What is a comparison rate schedule?
A
comparison rate schedule is a list of comparison rates for a range
of standard loan amounts and terms for a particular credit product.
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How is a comparison rate calculated?
Comparison rates are calculated in accordance with a standard
formula, which takes into account:
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Government charges, such as stamp duty or mortgage registration fees
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Fees and charges which may or may not be charged, because they
depend on some event which may or may not occur (for example, fees
for early repayment or redraw fees)
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Fees and charges which are not ascertainable at the time the
comparison rate is provided.
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Points to remember when using comparison rates
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A comparison rate can be a useful tool for comparing the cost of
different loans, but it is important to consider all of a loan’s
features and not just focus on the comparison rate. Remember the
comparison rate does not include government fees and charges
which will only be charges in certain circumstances. Therefore
the comparison rate may not provide a complete picture of the
total cost of a loan.
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The amounts
and terms shown on a comparison rate schedule do not represent
all the possible combinations of amount and terms. In order to
get an idea of the comparison rate which applies to your loan,
look at the comparison rate for the amount and term closest to
the amount and term of your loan.
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