Do you understand comparison rates?

Interest rates may be sitting at historically low levels, but a number of homeowners and investors are still confused about how to get the best deal.

Many mortgage holders focus on getting the lowest rate possible, however charges and fees also need to be taken into account when deciding on the best deal.

This is where a comparison rate comes in…

Unfortunately it appears that many Australians don’t understand what is meant by a comparison rate.

A 2015 nationwide survey undertaken by CUA found that just 29 per cent of Australians understood what was meant by a home loan comparison rate.

The survey found that 43 per cent of respondents misunderstood what the comparison rate was and 28 per cent admitted they had no idea what the comparison rate was.

What is a comparison rate?

The Australian Securities and Investment Commission (ASIC) definition of a comparison rate is as follows:

“A comparison rate is a rate that helps you work out the true cost of a loan. It reduces to a single percentage figure the interest rate plus most fees and charges relating to a loan. The comparison rate allows you to compare loans from different lenders to find out how much it will cost you.”

Does a comparison rate tell the whole story?

A comparison rate can provide a useful way to compare loans at a quick glance, however they don’t include “event-based” fees that can vary based on a borrower’s individual circumstances. This includes things like redraw fees, early termination fees, or fees for switching lenders.

Comparison rates also don’t take into account cost-saving measures such as fee waivers, interest offset agreements or special deals offered by the lender.

Read the fine print

You need to take all aspects of a loan into account when deciding what will be the best for you. Comparison rates are useful but make sure to look at other factors when determining the top deal.

If you’re confused about the difference between home loan deals and need help sorting the good from the bad it can be useful to talk to a mortgage broker.

The team at Professionals Finance are available for a chat to discuss what home loan would be best based on your individual circumstances.

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