What is a comparison rate and why is it important?

What exactly are comparison rates, and how are they calculated?

Comparison rates show you all of the rates related to your home loan. This includes the interest rates applied to your loan as well as all of the fees and charges that the borrower is obligated to pay. Because of this, a comparison rate is normally a lot higher than a headline interest rate.

Because of this, comparison rates can be a handy tool to look at when it comes time for you to choose what home loan is right for you. Looking at comparison rates can help give you a more realistic idea of what you will need to pay across the life of the loan.

How is it calculated?

Comparison rates are not created to be tailored to a specific loan, but instead are created using predetermined figures gathered from across all of the home loan providers. For the most part, comparison rates are calculated based off of a loan of $150,000 with a 25-year term, with a principal and interest repayment plan.

 

The best tool for picking a loan?

Because comparison loans are calculated using a set formula, they are a fair way to instantly see the differences between what home loan providers are offering. While this makes them an important tool to use when hunting for a home loan, they are far from the only factor that you should be taking into consideration when choosing a home loan.

Some other factors you need to think about are:

  • Does the provider allow you to make extra payments?
  • How flexible is the loan’s terms on redrawing? Are you allowed to access extra money you’ve deposited?
  • Can it be linked to an offset account?

Can you pause your loan repayments over a period of time? (In case you go on maternity leave, etc.

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