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What is a Comparison Rate? Do You Know What it Means?

What is a comparison rate? Do you know? Don’t worry, you’re not alone. 3 out of 4 Australians don’t know what a comparison rate is* but for those with a home loan, it is something important to understand – so here is our explanation!

A comparison rate is something that allows consumers to make an informed choice regarding the interest rate on a loan. This includes set-up and on-going fees and charges, so products can be compared – apples for apples.

The comparison rate combines the interest rate PLUS any fees associated with the loan. It works out what the fees and charges mean in terms of interest and works out a new comparison interest rate. This can provide you a clearer picture of what the actual cost of the loan will be and is provided so that consumers can more easily compare products and interest rates.

An Offset Account is a classic example of where there may be a small monthly fee or large annual fee. This will greatly alter the comparison rate.

Let’s look at an example:

Bank A may advertise an annual interest rate of 2.85%**

Bank B may advertise an annual interest rate of 2.99%**

However, Bank A might have a high ongoing annual fee associated with their loan, but Bank B has a smaller monthly fee. When the on-going fees and charges included and worked back as a percentage of interest, the comparison rate may look like this:

Bank A: 3.15%**

Bank B: 3.05%**

As you can see, by adding in the fees and charges, the “comparison rate” shows a different story. This is especially important to know. The cheapest interest rate might not be so cheap with an annual fee on the loan.

 

Your individual circumstances still dictates your choice

So, is looking at the comparison rate the best way in determining your loan of choice? In a word – no. The best loan for you will be determined by your individual goals, plans and financial situation.  What is right for your friend, work colleague or family member might not be right for you. This is why you should discuss your loan options with an experienced adviser, and something I can help you with.

Legally when any bank or lender advertises or quotes an interest rate, they must also display the comparison rate. As part of our personal service to you, we will demystify the process. The Home Loan Comparison Co will supply you with a product comparison displaying both the interest rate and comparison rates of the various products we are looking at for your loan.

*source (http://www.mpamagazine.com.au/sections/market-talk/3-out-of-4-aussies-dont-know-what-a-comparison-rate-is-237814)

** These rates are for an example only and do not relate directly to any actual interest rate offered or actual comparison rate.

The Home Loan Comparison Co.  compares home loans from a much wider variety of banks than most people have time to consider, and we find the loan that suits your goals.

We are experienced, knowledgeable and dedicated to building ongoing relationships to keep on providing personal and valuable service that is rarely experienced when dealing with the banks.

Talk to us today.

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