Do you know your stuff when it comes to comparison rates?
When you’re shopping around for a home loan, think of a comparison rate as a guide to the true cost of your loan.
Have you found yourself wondering why Aussie lenders show you an interest rate, as well as a side by side comparison rate? We’ve put together a handy 101 cheat sheet, to help you understand what they are and how you should factor them in when deciding which home loan or lender to go with.
What’s a comparison rate?
Comparison rates help you calculate the true cost of your home loan. It combines the interest rate/s on your loan, plus a number of the fees and charges you can expect to pay across the lifetime of your loan. This single number can be compared to other lenders to make it as easy as possible to work out the how much a loan will really cost you.
The above example clearly shows that Home Loan A has a lower interest rate than Home Loan B, but the fees and charges are much higher. When you look at the comparison rates, the comparison rate for Home Loan B is lower, meaning Home Loan B might actually be the cheaper option in the long run.
How are comparison rates calculated?
Every home loan lender in Australia is legally required to provide comparison rates (good!). And to remain consistent, they’re calculated to the exact same standard so everyone is on a level playing field. The standard is made up of:
- A $150,000 home loan
- A 25-year term
- Upfront costs charged by the lender like application fees
- Ongoing fees that will be incurred during the life of the loan like monthly service fees
- Any “revert rate”: this is the interest rate applicable to the loan after the end of any honeymoon rate, interest only or fixed rate period
There’s a watch out here! According to the ABS (as of March, 2018), the average owner-occupied home loan is $388,900, not $150,000. And don’t forget that not every loan has a 25-year term. Then there are the things that aren’t included in a comparison rate. So, while a comparison rate is a nice guideline to have, it may not be accurate for your exact situation and shouldn’t be the only thing you take into account when choosing a home loan.
What it doesn’t include:
Comparison rates don’t take everything into account, and there could be fees and costs that aren’t included that might eventually influence the cost of the loan. This includes non-standard fees charged by banks like:
- Early repayment fees
- Redraw fees
- Offset accounts
- Fee waivers
UBank’s comparison rates
At UBank, we try to keep things as simple as possible.
*This is our current Standard Variable Rate for Owner Occupier Principal and Interest loans including the relevant discount offer. Conditions apply.
When you look at them side by side, our variable home loan interest rate and the comparison rate are exactly the same.
That’s because we don’t have any ongoing fees or sign-up costs associated with our variable home loans. One of the many benefits of being a digital bank with no physical branches (and costly overheads) means we get to pass those savings directly on to you.
Comparison rates can reveal a lot about what to expect from your home loan, but they don’t always give you the whole picture. Use them as a guide, but factor in your own personal circumstances, budget and ambition when deciding where you borrow your money from.
Note: UBank Fixed Rates (1, 3 and 5 years) do have a differentiated comparison rate. This reflects the fact that a one-off fee applies to fix your rate, and after your fixed rate period ends, a different interest rate will apply (a variable rate).