Sometimes called an ‘average annual percentage rate’ (AAPR), a comparison rate is a legally required piece of information that must be displayed by lenders when advertising a home loan annual interest rate. The idea behind a comparison rate is to essentially give consumers the ability to more accurately identify how much a home loan will cost them.
For Australians buying their first home, a comparison rate might be initially confusing. We’ve laid out some things you might want to know in this handy guide so that you can make a more informed decision when choosing a home loan.
Interest rate vs comparison rate
Many consumers will initially look at the interest rate of a home loan to determine how good an offer may be. This can be misleading as the interest rate doesn’t factor in other costs.
A home loan comparison rate is a representation of the entire cost of a home loan on an annual basis. Normally, a comparison rate will comprise of a home loan interest rate used to calculate monthly repayments, upfront fees, and ongoing fees. The comparison rate aims to gives consumers a more accurate picture of the real cost of a particular home loan.
Lenders have been legally required to share comparison rates with consumers since July 2003 as a way of ensuring that the true cost of home loans is more transparent.
How is a comparison rate calculated?
A comparison rate is calculated using a number of different variables, as defined by the National Consumer Credit Code. However, it’s important to note that key variables used in the calculation are based on a number of assumptions, including:
•An assumed loan amount of $150,000
•An assumed loan term of 25 years
•The frequency of home loan repayments
•Monthly account fees (if applicable)
•Annual fee (if applicable)
•Establishment fee (if applicable)
•Valuation fee (if applicable)
•Mortgage documentation fee (if applicable)
According to the Australian Bureau of Statistics (ABS), the average loan size of an owner-occupied home was $395,800 in August 2018. Therefore, as advertised comparison rates may not be based on ‘realistic’ loan sizes, it’s best that consumers only use them as a reference when comparing like for like products.
Are comparison rates important?
In 2016, the member-owned lender CUA released a National Mortgage Survey which revealed that more than two in three Australians did not understand what a comparison rate on a home loan was.
This statistic is relatively alarming, given that comparison rates do hold quite a lot of significance for consumers looking to find a home loan. As we’ve already highlighted, comparison rates tell a much bigger story in terms of the overall cost, loan fees and features.
Serious life events can strike at any time and can cause people issues in generating an income that allows them to fulfil their mortgage obligations. However, an ALI Loan Protection Plan can offer a financial buffer should you experience a serious problem that prevents you from working. To learn more about how ALI could give you the peace of mind you deserve, contact your local mortgage broker today or request your loan protection quote here.
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