When you’re looking for a new home, it’s unlikely that you end up buying the very first one you see. Instead, most people attend a few open homes to learn about the local market and understand what good value looks like, before making their purchase decision. Choosing your home loan should be the same - shopping around and comparing your options before you apply can help you find a better deal and save you serious money in the long run.
Luckily, comparing home loans can be simple thanks to the comparison rate. This useful figure gives an indication of the true cost of any home loan without the need to get your calculator out. But understanding exactly what the comparison rate is, and how and why it differs from advertised rates, can be tricky to get your head around.
We’ve taken a closer look at what comparison rates are and how you can use them to help you find a better deal on your home loan.
What is a comparison rate?
The cheapest loan doesn’t always have the lowest interest rate. That’s because interest isn’t the only cost for most home loans - many lenders charge fees when you apply for a loan as well as at regular intervals throughout the loan period.
While the top line interest rate figure only includes the interest charged on your home loan, the comparison rate includes the interest rate and many of those extra costs. That includes:
- Upfront costs like loan establishment fees.
- Ongoing costs like monthly service fees.
- Other factors that affect the cost of the loan, like repayment frequency.
Comparison rates are designed to help you compare the true cost of similar home loans by rolling most of the costs into one easy-to-understand number.
All lenders are required by law to display their loan comparison rate when they advertise fixed term credit loans. However, it’s important to still note that comparison rates may not include all costs incurred when taking out a home loan such as:
- Government charges like stamp duty or mortgage registration.
- Fees that are only charged in some circumstances (like if you pay your loan off before the fixed term ends).
- Charges associated with extra loan features that may or may not be used.
- Fee waivers or other savings from loan features such as an offset account.
If you’re unsure about whether extra fees may be charged, speak to the lender to clarify. Reading the loan’s product disclosure statement should also help you understand all of the fees due.
Important considerations when using a comparison rate
Comparison rates make comparing home loans easier but they do have their limitations. Comparison rates for home loans are calculated using a $150,000 loan principal amount and a 25-year loan term and, as mentioned above, they don’t take into account all possible fees.
That means the comparison rate may not be truly representative of the costs of your loan if:
- Your loan principal is significantly smaller or larger.
- The loan’s term is longer or shorter than 25 years.
- You add features to your loan that your lender charges for, such as a redraw facility (if it has fees associated with it).
- You repay your loan early (and are charged a fee for this) or incur late payment charges.
If your loan’s term and principal amount differs from the amounts used to calculate the comparison rate, it’s best to view the numbers cautiously and use them as an indication of potential additional the costs of a loan rather than a truly accurate representation.
Using comparison rates to compare home loans
When looking for a home loan, watch out for loans that are advertised with low interest rates and high comparison rates. These usually come with high bank fees and may cost you more in the long run than loans with higher interest rates but lower fees.
Our No Frills Home Loan is a great example of a home loan where the low-interest rate also matches the comparison rate.#
If you are looking for a competitive interest rate with no application fees or bank fees, and you don’t need an offset account, then our No Frills Home Loan may be the home loan for you.
These are just some of the reasons it was awarded Mozo’s Split Home Loan Experts Choice Award in 2020.
If you want to say goodbye to bank fees with a simple home loan with a highly competitive comparison rate, check out our No Frills Home Loan and consider applying online today.
Qudos Mutual Limited trading as Qudos Bank ABN 53 087 650 557 AFSL/Australian Credit Licence 238 305. The information in this article is of a general nature and has been prepared without considering your objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances.
Loans are subject to approval. Normal lending criteria, terms and conditions and fees and charges apply. Mortgage insurance is required for home loans over 80% and is subject to approval.
#WARNING: Qudos Bank’s comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rates but may influence the cost of the loan.
You should read and consider the relevant Terms and Conditions and our Financial Services Guide available on our website qudosbank.com.au, before deciding whether to obtain any of our financial products or services.
Article published July 2021