Comparing Interest Rates: How to Outsmart Financial Institutions
If you haven’t revisited your home loan in the past couple of years, chances are you’re overpaying. Why? The competition among banks and lenders has reached new heights, and they’re eager to win your business often through discounts, incentives, and exclusive offers for new customers.
But how can you ensure you’re getting the best deal possible?
Enter comparison rates. These are tailored to help you calculate the complete cost of a home loan by incorporating known expenses like upfront fees and ongoing changes in the interest rate. For instance, a prominent Big 4 bank is currently advertising a fixed-rate loan at 6.54% per annum with a comparison rate of 6.95% per annum.
Navigating the labyrinth of rate comparisons between various lenders can be daunting, and that’s where the comparison rate comes in handy. This tool can potentially save you a significant sum, as the gap between a favourable, competitive rate and a burdensome mortgage rate can be as wide as 2% or more, translating to hundreds of dollars monthly.
Bit how much emphasis should you place on comparison rates? Is there a better way to make comparisons?
The Pros and Cons of Comparison Rates
If you are ready to explore better financing options, comparison rates can prove invaluable. Typically, the average borrower glances at the advertised interest rate and assumes that’s what they will be paying. However, the comparison rate aligns more closely with the actual rate you will be charged.
By legal mandate, banks must disclose both the interest rate and the comparison rate for a home loan, encompassing all fees and ongoing expenses. These regulations, instituted years ago, have proven beneficial in theory.
Before their introduction, a bank could advertise an enticingly low-interest rate, only for borrowers to later discover exorbitant annual fees and monthly account maintenance charges. It was akin to booking a budget vacation deal, only to find out that flights, meals, and other essentials were not included, effectively doubling the initial cost.
In the past, a bank might have touted a 4.99% interest rate, but then added a $30 monthly account fee and a $400 annual package fee, totalling an extra $760 per year on your home loan. A home loan with a 5.2% interest rate but without ongoing fees might be the most cost-effective option. Comparison rates were introduced to help consumers make apples-to-apples comparisons in such scenarios.
However, they are not without their imperfections. While they provide greater clarity by accounting for several fees and charges specific to a given loan, they do not include factors such as government charges, redraw fees, or fee waivers.
Comparison rates are calculated based on a loan size of $15,000 over a 25-year term. In 2023, the average Australian loan size is nearly $600,000 which is roughly four times the example used for comparison rates, with an average loan term of 30 years. These rates haven’t kept pace with rising property prices, rendering the advertised comparison rate somewhat realistic.
What’s the takeaway for borrowers?
As a seasoned broker, my advice is to always consider the bigger picture when choosing a lender for your mortgage. Factors to weigh include:
- The interest rate
- The comparison rate
- Ongoing fees
- Features like offset and redraw options
- Other banking and financial requirements
- Incentives and discounts, such as cashback
- Benefits like credit card fee waivers
What Is a Comparison Rate?
A comparison rate is designed to help you understand the true cost of a home loan by incorporating known expenses like upfront fees and ongoing changes in the interest rate. It provides a more accurate picture of how much you'll actually be paying.
How Are Comparison Rates Calculated?
Comparison rates are calculated based on a loan size of $15,000 over a 25-year term. However, this may not be representative of the average loan size today, which is nearly $600,000 with an average loan term of 30 years.
What Are the Limitations of Comparison Rates?
While comparison rates account for several fees and charges specific to a given loan, they do not include factors such as government charges, redraw fees, or fee waivers. This means they may not fully represent the actual cost of the loan.
What Should I Consider When Choosing a Home Loan?
When choosing a home loan, consider multiple factors such as the interest rate, the comparison rate, ongoing fees, features like offset and redraw options, and other financial requirements like incentives and discounts.
How Can a Finance Broker Help Me?
A trusted finance broker can help you navigate the complex landscape of home loans. They can analyze the market, present you with suitable options, address your questions, and offer guidance throughout the process.
Navigating this multifaceted landscape can be overwhelming on your own. This is why collaborating with a trusted finance broker can prove beneficial. Instead of sifting through banks independently, we can analyse the market, present you with suitable options, address your questions, and offer guidance throughout the process.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.