If you are borrowing money for a new home, renovations, investment, or a car, it is important to understand what the true cost of the finance – the comparison interest rate.
A recent Survey undertaken by Loan Market revealed that up to 40% of borrowers didn’t know what a comparison interest rate was!
Why the Comparison Interest Rate is important
The concept behind the Comparison Rates is to allow consumers to effectively compare finance offers from different Lenders with greater accuracy.
Whilst a headline interest rate may seem attractive, fees and charges, or the way the finance is structured, can make the total cost of the finance more expensive.
In essence, you need the Comparison Interest Rate to compare “apples to apples”.
What does a Comparison Interest Rate include?
Lenders in Australia are required to show a comparison rate alongside the interest rate for consumer type loans. (Home Loans, Personal Loans, Car Loans etc)
The Comparison Interest Rate will include:
- The interest rate
- Most fees and charges (refer below)
- The loan amount
- The loan term
- Repayment frequency
What doesn’t the Comparison Rate include?
The Comparison Rate doesn’t allow for items such as:
- Government fees and charges (e.g., Stamp Duty)
- Interest Offset arrangements (Use of an Offset Account)
- Fees that apply only in particular circumstances (early repayment fees)
Additional Features Can Cost
If seeking finance with an Offset Account, loan redraw or a Line of Credit it is important to weigh the cost of these options, against the benefits you will derive.
For example, a Line of Credit whilst offering greater flexibility, is likely to involve a higher interest rate. The degree to which you benefit will be determined by how low the average balance of the facility will be compared to a traditional principal and interest loan.
Similarly, with a Mortgage Offset Account, if there is a cost attaching to it, will the benefit you derive be sufficient to offset the cost?
With Loan Redraws, will the increased flexibility & peace of mind this provides, be sufficient to offset any fees or charges that may apply?
Summary
Comparison Interest Rates are a helpful way to assess finance offers from different Lenders.
Although as outlined, there are additional elements you need to consider, they are a great starting point.
That said, there is no “one size fits all” and it is important that any finance package is tailored to your personal circumstances and goals.
If you would like to learn more, don’t hesitate to give me a call.
