Whenever you see an interest rate, it may display this awesome low interest rate, then beside it you may see a ‘comparison rate’ which is considerably less attractive – with a (*) and no explanation for the higher rate. Understanding the comparison rate is imperative in choosing the right loan for you.
The Comparison Rate is an indicative interest rate that is designed to help members identify the ‘true cost’ of a loan. It takes into account the interest rate and “ fees and charges” that relate to the loan. In simple terms, the comparison rate takes account of the interest rate and costs to obtain a loan such as application fees and valuation fees. In a single interest rate.
A comparison rate is made up of the following:
- the amount of the loan;
- the term of the loan;
- repayment frequency;
- interest rate; and
- fees and charges (excluding government charges, such as stamp duty and mortgage registration fees)
What isn’t included?
The Comparison Rate does not include fees and charges that may occur or are based on a future “event” such as:
- Government charges such as stamp duty or mortgage registration fees
- Fees and charges associated with loan options or events that may or may not be used by the borrower, such as early repayment or redraw fees
- Fees and charges which aren’t available at the time the comparison rate is provided
- Cost savings such as fee waivers or the availability of interest offset
The comparison rate is a useful tool for borrowers to compare the cost of different loans, it should be remembered that it doesn’t provide the total picture.
What is a comparison rate schedule?
Comparison rate schedules are comparison rates that have been generated for each kind of loan offered, showing the comparison rate for a selection of standard loan terms and amounts. These standard loan terms and amounts are provided by different lenders over a wide variety of possible loan scenarios which allows consumers to compare the products.
The comparison rate schedule gives you an opportunity to compare the same standard loan amounts and loan terms from numerous credit providers.
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Ivan Filipovic is an experienced, independent Property, SMSF and Finance Expert and the founder of Redwood Advisory. Ivan has been educating and coaching investors for over 15 years and has built a successful property portfolio with a number of positive geared properties across Australia.
Ivan provides valuable and honest guidance by educating Australians on how to invest successfully protect yourself with knowledge, contact Ivan today for a complimentary consultation on 1300 790 110 or email ivan@redwoodadvisory.com.au
Disclaimer – The content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. The author and Redwood Advisory disclaim responsibility for reliance on the information detailed in this article.
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