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Home Loan Comparison Rates Explained

Comparison Interest Rate Explained.

The comparison rate is quoted to help consumers compare loan products to each other on a whole of loan cost basis that includes the major costs & fees. The calculation factors in the interest rate, fees and charges and displays a single percentage rate that can be used to compare various loans from different lenders. From 1 July 2003, the Australian Government made it mandatory to display a comparison rate for any advertisement of a credit rate – including home loans.

Factors affecting the Comparison Rate.

Comparison rates for a loan product are calculated according to a government prescribed formula using a number of factors, including:

How is the Comparison Rate Calculated?

The comparison rate is calculated based on the following numbers:

In this example, the loan amount is actually based on $150,000, which is much smaller than the average home loan size in Australia. This means that any home loan that has fees associated with it, those fees have a larger than expected impact on the comparison rate. For example, let’s look at a typical major bank loan product:

Now let's consider a similar standard variable rate loan:

The Effect of Loan Size on the Comparison Rate.

Because the costs of the loan are a substantial part of the comparison rate calculation, the comparison rate will vary depending on loan size. For example, consider this $100,000 loan :

By Comparison, the same loan, but for $650,000, would have a comparison rate of 6.81%, because the costs reflect a smaller portion of the total loan.

Please keep this in mind when doing Home Loan Comparison exercises and be sure to call us for up to date professional advice.

Please contact us today using the Express Enquiry Form at the right for up to date information on Home Loans in Perth. Together we will get you there.

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