If you’re in the market for a home loan or personal loan, you might have noticed something called a ‘comparison rate’ displayed alongside the loan interest rate. By law, Australian lenders are required to show customers a comparison rate which aims to help you compare loans and find the right loan for you.
Interest rate versus comparison rate
The Interest rate on a loan indicates how much interest you will be charged per year on the balance of your loan.
The Comparison rate includes the interest rate along with some additional fees and charges relating to the loan such as establishment fees and ongoing monthly or annual fees.
What is the purpose of a comparison rate?
A comparison rate is designed to give you a better understanding of the true cost of the loan, rather than just the interest rate.
If you’re comparing home loans from different lenders, looking at the comparison rate is especially useful as the loan with the lowest interest rate isn’t always the cheapest option. For example, a loan that has a low interest rate might have high fees and charges and as such, may have a higher comparison rate than a loan with a high interest rate but low fees and charges.
Things to keep in mind
The comparison rate is a good starting point for comparing loans and looking for an affordable option, but it may not be an accurate reflection of your loan needs.
A comparison rate on a home loan is legally mandated to be calculated based on:
- An example loan of $150,000
- A loan period of 25 years
- A principal and interest loan
Remember to also look at the loan features as home loan inclusions such as redraw facility, mortgage offset account and the ability to make additional repayments can all make a huge difference during the course of your loan.
If you're looking for a home loan or to refinance, chat to one of our lending consultants who can assist with personlaised advice to get you on the right track.
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Auswide Bank Ltd Australian Credit Licence 239686 is the credit issuer. This is not an offer to lend – approval is subject to credit assessment criteria. Terms, conditions, fees and charges apply – full details on application. This information provides general advice only. We do not provide advice about this product based on any consideration of your personal objectives, needs or circumstances