Truth Behind Comparison Rate

The widely used number is becoming outdated and needs to be refined

- Effie Zahos

There’s a home loan that’s advertised for 3.69% and another for 3.52%. Which do you choose? Savvy shoppers know that aside from looking at features you should never compare loans based on their advertised rates but rather their comparison rates. The problem with this, though, is that some experts are now suggesting that comparison rates may have passed their use-by date.

Vincent Turner, CEO of online mortgage broker Uno Home Loans, says comparison rates, while noble in their intention, don’t accurately demonstrate the true cost of a loan to the consumer. “The main reasons for this are that comparison rates are calculated using a loan value of $150,000 – significantly less than the value of the average Australian mortgage – and are always calculated across a 25-year term.”

By law lenders must show you the comparison rate. The figure typically includes the interest rate as well as most upfront and ongoing fees and charges.

Whatever its shortcomings, it does help customers identify the true cost of a loan. As an example, a loan with an advertised rate of just 3.74% and no establishment fee could have a comparison rate of 4.06% because of an ongoing annual fee and a discharge documentation fee.