What is the difference between an Advertised Rate and a Comparison Rate?

Some home loans come with incredibly low-interest rates. However, after factoring hidden fees and ongoing charges, the interest rate is not as impressive as you initially thought. That’s why it’s mandatory for lenders to publish a comparison rate. In this article, we’re going to look at the comparison rate, and how it relates to the advertised rate.

There’s more to your loan than an interest rate

Your interest rate is the most important indicator of your total loan amount.  Regardless of the purchase price, the higher the interest rate, the more you will pay. For this reason, prospective buyers shop around for the best interest rates, before signing on the dotted line.

However, the interest rate is not the only determining factor in the total cost. Other fees and expenses may be incurred periodically over the life of the mortgage, and these are going to contribute to a higher all-in purchase price.

The problem is that it’s easy to overlook these additional fees when shopping around for a mortgage. In the past, this has led some less-than-scrupulous lenders to hype exceptionally low interest without drawing attention to the extra hidden fees and charges. Buyers who haven’t taken notice of the additional charges could end up getting a significantly less attractive deal on their mortgage than anticipated.

Comparison rates level the playing field

The reality of hidden fees and additional expenses is why comparison rates are available. Today, all Australian lenders are required to display a comparison rate alongside the advertised rate. This comparison rate comes in useful – especially when the advertised rate seems too good to be true – because it takes those extra fees and charges into account. The comparison rate helps borrowers get a better idea of the type of loan they’re considering.

But there are a few things to keep in mind regarding the comparison rate. The first is that – as a point of reference – it may not fully relate to the mortgage you’re considering. First of all, comparison rates usually apply to an example loan of $150,000 over a period of 25 years. You’ll have to read the fine print to be certain of this information.

The reality is that most homebuyers borrow much more than $150,000. You may also be considering a mortgage of a different term length. To that end, the comparison rate should only serve as a point of reference. When consulting this rate, always pause to consider how the example differs from the loan for which you are you are applying.

Published comparison rates have the lenders’ best interests in mind

The law requires that financial institutions publish a comparison interest rate as a form of transparency. It’s a legal requirement and a kind of protection for borrowers. As a leading specialist Sydney Mortgage broker, at ACA Mortgage Solution, we strive to ensure that our clients fully understand the terms and repayment conditions of each possible loan we present. If you need any help interpreting the comparison rate on a particular loan package you’re considering, please don’t hesitate to contact us.