[3 min Wed finance series] What is Comparison Rate and how does it help me?

You walked past a bank and saw the promotional ad hanging outside the window and you thought to yourself – wow that’s one attractive interest rate! But is it really saving you the most? That’s where Comparison Rate comes into play.

One of the most common mistakes people make when choosing a home loan is making decisions on choosing a product purely based on the advertised product interest rate. Chances are by doing it this way most of the time they’re not saving you the most…

That’s why there is such thing as “Comparison Rate” and guess what, they are usually in the super small print, next to the advertised board! You probably would’ve guessed why it’s small – because it’s not as attractive!

What is “Comparison Rate” anyway? You might ask.

As according to ASIC* – a comparison rate is a rate that helps you work out the true cost of a loan. It reduces to a single percentage figure the interest rate PLUS most fees and charges relating to the loan. The comparison rate allows you to compare loans from different lenders to find out how much it will really cost you.

So as an example, you might have:
Product A
Interest Rate: 3.9%
Comparison Rate: 4.4%

Product B
Interest Rate: 3.75%
Comparison Rate: 4.5%

So in this case, even though Product B has a lower advertised Product Interest interest rate but the Comparison Rate is actually higher which means it’ll cost you more by choosing this product.

Now there could be a number of reasons why the comparison rate for Product B is higher – it may have more features and benefits than Product A so will incur higher Fees & Charges as a percentage. For example Offset Facility, ability to Split or Switch the loan, Portability etc. So it may not necessarily be a bad thing – all comes down to ticking your requirements or what we call, “suitability”.

As an example – if a first home buyer comes to me seeking a loan with very little deposit, a white-label product could be a better fit for them due to no associated fees and they may not have a lot of cash available after the property settles. And if they want to pay off the home as quickly as possible, in this case a no-thrill product may suit them better as the advertised interest rate will be very close to comparison rate.

So if you’re unsure whether a specific product is a good fit for you, you can always speak to your broker or bank and request for a Product sheet in order to understand benefits/features as well as Comparison Rate associated with a product.

Is your current finance optimized in the way so you can pay off your home/investment loans as quickly as possible? Contact David Shih today on 0410 291 536 or email david@lendpower.com.au to organise a finance health check and see whether there are ways that we can assist you with paying off your home/investment loans faster!

*Source: https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/interest-rates/comparison-rates

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