By Guest Blogger, Louisa Sanghera, Principal Broker,
Zippy Financial
If you haven’t changed your home loan in the last year or two, there’s a good chance you’re paying too much. Why? Because banks and lenders are very competitive, now more than ever – they want your business and they’re willing to offer discounts, incentives and special deals to attract new customers.
But how do you know if you’re getting a good deal?
Enter comparison rates. These are designed to help you calculate the total cost of a home loan by adding the known costs (such as up-front and ongoing fees) into that rate. For instance, there’s a Big 4 bank with a fixed rate loan in the market right now advertised at 6.54% pa and a comparison rate of 6.95% pa.
It can be really hard to work out how to compare rates between different lenders, and the comparison rate aims to help you – which is great, because navigating this maze can save you a small fortune. The difference between a good, competitive rate and a high mortgage rate can be as much as 2% or even more, which means we’re talking hundreds of dollars a month.
But how much weight should you put into comparison rates? And is there a better way to compare?
The pros and cons of comparison rates
If you’re ready to shop around for a better deal on your finance, comparison rates can be useful. The average borrower typically looks at the quoted or advertised interest rate and thinks that will be the rate they're paying, but the comparison rate is closer to the real rate you’ll pay.
By law, banks need to quote both a home loan’s interest rate and the comparison rate, which includes all of the fees and ongoing charges. These laws were introduced many years ago and they’re a really good idea – in theory.
Before them, a bank could advertise a loan with a super low interest and you think you’re getting a great deal, only to realise it comes with sky-high annual fees, monthly account keeping charges. It’s a bit like when you see a special deal for a holiday, and then find out that flights and meals are not included and the quoted cost ends up doubling.
Back in the day, a bank might have advertised a rate of 4.99%, but then charge $30 a month account keeping fees and $400 a year package fee, effectively adding $760 a year to your home loan. A home loan with a rate of 5.2% but no ongoing fees may be the cheaper option, and comparison rates were introduced to help you compare apples with apples.
But unfortunately, they’re not perfect. While they add some clarity, they’re more like comparing apples with pears rather than apples with apples.
The big problem with comparison rates?
I have two issues.
The first: while the comparison rate includes a number of fees and charges that apply to that specific loan, so you won’t be surprised by any hidden extra costs, it doesn’t include things like government charges, redraw fees or fee waivers.
It factors in the interest plus known fees and calculates the total cost as a percentage of the loan value. So, while it’s a good indication, it’s by no means the full picture.
Secondly, comparison rates are based on a loan size of $150,000 over a period of 25 years. The average loan size in Australia in 2023 is almost $600,000, or 4 times the comparison rate example, and the average loan term is 30 years.
Back when comparison rates were introduced 20 years ago, $150,000 was an average mortgage amount, but they have failed to keep pace with rising property prices. As a result, the comparison rate advertised doesn’t give you a realistic idea of how much you can expect to pay.
So where does this leave you as a borrower?
As an experienced broker, my advice is to always look at the bigger picture. When deciding on which lender to choose for your mortgage, consider a range of factors including:
• The interest rate
• The comparison rate
• Ongoing fees
• Features such as offset and redraw
• Your other banking and finance requirements
• Incentives and discounts, e.g., cashbacks
• Benefits like fee waivers on credit cards
It’s a lot to navigate on your own which is why working with a trusted finance broker can be helpful. Rather than researching and selecting the banks yourself, we can review the market and present you with a number of suitable options, and we can answer any questions and provide gudiance along the way.
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