- What a comparison interest rate is, and how it is calculated.
- The purpose of the comparison interest rate.
- The rate of interest that you actually pay on your home loan.
Shopping for a home loan can be a complex process. There are so many rates, percentages, and features to consider in order to determine which is the best loan for you.
The comparison rate is intended to make the job of comparison easier for prospective borrowers. But what is it and how can it help you select the best loan? Find out below.
In this guide
What is the comparison rate?
A comparison rate is a figure that represents an estimate of the total cost of a loan expressed as an annual percentage interest rate. It is also referred to as the Average Annual Percentage Rate (AAPR). This annual percentage rate includes the interest rate applicable to the loan as well as most of the upfront or ongoing loan fees.
Disclosing the comparison rate alongside the advertised interest rate of loan products has been a legal requirement for lenders since 1 July 2003. Comparison rates are only applicable to loans that have a fixed term.
Comparison rate vs interest rate
There is a very distinct difference between a comparison rate and the interest rate of a loan product.
The interest rate is the rate of interest the consumer will pay on the loan. Interest rates are generally expressed as an annual percentage, but interest is calculated daily and usually added to your loan balance at the end of each month. Unlike the comparison rate, a basic interest rate does not take into account any additional loan fees.
For a more detailed investigation of the difference between the advertised interest rate and the comparison rate, please refer to our guide for interest rate vs comparison rate.
How is the comparison rate calculated?
Calculations related to a comparison rate are based on a loan of $150,000 taken out over a 25-year loan term. Comparison rates include the interest rate plus any unavoidable fees and charges for the loan, such as an application fee and monthly account-keeping fees.
What are comparison rates used for?
For consumers, using a comparison rate to compare loan products can ensure significant savings over the course of the loan. That’s because the loan with the lowest rate is not necessarily the cheapest loan available. Many loans with low interest rates have higher fees payable over the course of the loan.
Since the comparison rate is calculated on a $150,000 loan and a 25-year term, it is out of step with the reality of current home loan borrowing conditions. So, it is important to undertake additional research and calculations when choosing a loan product, using the comparison rate as a guide only.
Comparison rates do not take into account all of the loan fees and charges – only the unavoidable ones – and also do not consider any other features which make a loan product more attractive, such as an offset account or redraw facility.
What rate do you actually pay?
The advertised interest rate, not the comparison rate, is the rate of interest you will pay on your loan. The comparison rate is shown only for the purpose of comparing total loan costs, including fees.
Comparison rates are also displayed when comparing personal loans and car loans.