How many of us are looking beyond the advertised interest rate to examine the “Comparison Rate”, or even giving any thought to where that figure comes from?
The use of the comparison rate came about because many lenders normally charge borrowers more than just the applicable interest during the life of the mortgage.
Most charge one or more fees as well, ranging from ongoing monthly fees and establishment fees to default fees and early exit fees, just to name a few.
So what the comparison rate attempts to do is quantify the real cost of the loan over time, including fees.
For example, if you had two loans with an identical advertised rate of 5.0%, but one has an establishment fee of $450 whilst the other doesn’t, the comparison rate would be around 0.02% different.
The aim to enable borrowers to "compare apples with apples" as the saying goes. Similarly, a number of lenders will advertise a ‘honeymoon rate’ that only applies for the first few years of the loan before it reverts to their normal rate.
This why you might see a Bank advertising a variable mortgage rate of 4.65% but the comparison rate actually turns out to be 5.2%. That’s quite a difference, isn’t it!
The most important thing to remember when shopping around for a loan is to check the comparison rate, ask for a loan fact sheet, and ask lots of questions about why the figures are different.