Interest rates vs. comparison rates
They sit side-by-side and seem to represent similar things, so what is the difference, and the link, between an interest rate and a comparison rate?
August 22, 2018 • 1 min read
Same same, but different
Put simply, an interest rate is the fee banks charge you for borrowing money. It is represented as the percentage of your total loan amount which you will be paying. Interest rates are simple, comparison rates are a little bit more complicated.
A comparison rate gives a more accurate representation of the rate of your loan. It considers the extra fees associated with the home loan over its lifetime: the interest rate of the loan, plus the cost of setting up the loan and the loan approval fee; plus any ongoing fees; plus any discharge fees for leaving the lender. That is why a comparison rate is commonly much higher than its interest rate. The higher the comparison rate, the more fees and extra costs there are associated with the loan.
This is why you should pay attention to comparison rates, as they are a way of understanding the true cost of a loan, and to compare lenders on an even playing field. By including the total interest, fees and charges, it makes it easier to compare like-for-like between different home loan providers. Good to know: It is mandatory for lenders to display an equally prominent (and accurate) comparison rate next to their advertised rate.
Why are these rates important?
Both rates are important depending on what information you are looking for. The interest rate of a loan can be used to calculate how much your repayments will be. A comparison rate is useful when comparing multiple loans because it’s the easiest way to see which loan will be the cheapest. The enforcement of the comparison rate is an attempt to create more transparency in the home loan industry, which is partly what makes it so important. It keeps lenders honest and prevents them from advertising incredibly low rates which are really topped up with excessive fees.
Comparison rates don’t cover everything
Home loan comparison rates are based on a $150,000 loan over 25 years (which is defined by legislation) and don’t cover every single cost associated with a loan. This means the comparison rate may not be 100% accurate for your exact situation (but it gives you a pretty good idea). While comparison rates do give you a better idea of the true cost of your loan, they don’t consider every factor contributing to its cost.
Things which are considered:
- The interest rate of the loan
- Any application or package fees associated with the loan
- Any settlement fees charged by the lender
- Any ongoing fees associated with the loan
- Any discharge or exits fees associated with the loan
Things which aren’t considered:
- Any fees that are associated with optional features
- Government fees and charge (stamp duty for example)
- Late payment fees
Looking beyond the rates
Picking the right home loan will require you to look at more than just the interest and comparison rates. Choosing the right loan for you can mean saving thousands of dollars, and we all want that. To make sure the loan you apply for is right for your circumstances, there are some other factors to consider.
Things to consider:
- The amount you are borrowing
How much do you need to borrow? The more you borrow, the more interest you’ll accumulate.
- The term of the loan
How soon can you pay it off? The longer you take to pay off your loan, the more interest you’ll pay.
- Fixed vs variable rates
Do you need stability in your repayments, or do you need more flexibility?
- Features of the loan
Will you be able to make extra repayments if you wish? Can you have an offset account?
Why don’t you put your new knowledge to use and compare Tiimely Own's rates.
(You’ll see our comparison rates are a lot lower than other providers out there, because there are no hidden fees associated with applying for a Tiimely Own home loan.)