When researching the best home loan for your circumstances, it is helpful to acquaint yourself with just how much it will cost you each year compared to similar loan products on the market.
The trouble with this idea is that lenders advertised two different rates when you’re looking at a home loan. They are known as the “advertised rate” and “comparison rate”.
The advertised interest rate reflects how much interest you will be charged per year on your loan balance. This affects your monthly repayments and doesn’t include any fees or charges.
It is a legal requirement that all lenders share the comparison rate in an attempt to give borrowers a more accurate indication of the cost of the loan over its term. A comparison rate is sometimes referred to as the “true rate” and is comprised of an estimate of the additional fees that come with a loan to help you understand how much money you will pay for the loan over its term. It is important to note that a comparison rate does not consider government fees such as stamp duty costs.
Moreover, the comparison rate can be misleading due to its limited parametres and inability to assess the consequence of fixed rates. For instance, the comparison rates for all home loans and loans secured against real property are based on secured credit of $150,000 and a term of 25 years. This creates some grey areas if you intend to borrow significantly more than $150,000 for a property.
Typically, a comparison rate is intended to show a total annual percentage rate. The comparison rate can help potential borrowers work out the total cost of the loan and match it against other similar products on the market.
However, with borrowers refinancing every five years on average, be mindful that the comparison rate may be calculated on a smaller mortgage amount and a reduced mortgage term.
At the end of the day, if you were considering interest rates, you might be forgiven for thinking two loans with an identical advertised rate cost the same. But the comparison rate can help reveal whether one loan costs more than the other. But to get the complete picture of what a loan will cost, it is best to speak with an accredited mortgage broker such as Our Broker.
At Our Broker, we will be able to identify the actual costs of a loan which may be the difference between thousands of dollars in extra costs over the term of a loan.
To find out more about the right home loan for you, contact Our Broker on 1800 913 677 or email us at [email protected] to make an appointment.