Fundamentally, interest rates and comparison rates represent the same concept: costs attached to a mortgage on a monthly basis that significantly affect a homeowner or prospective buyer’s payments and budget.
But as the name of the latter implies, one is more directly applied while the other is mostly a contextual tool. Here’s a quick rundown of the key distinctions between interest and comparison rates, and why it’s essential to have at least a cursory understanding of each, no matter where in the homebuying process you may be:
What are lenders obligated to provide?
Lenders have to disclose both the interest rate they offer to the buyer, as well as a list of comparison rates, as noted by Finder.com.au. Typically, the comparison rate is laid out over 15- or 30-year terms and based on buyer-profile averages, while the actual interest rate may be attached to a loan of five, seven or 10 years, among other term durations, and appropriated based on a range of criteria specific to that particular homebuyer. In other words, while comparative rates serve as a helpful gauge for those in the shopping stage, the interest you actually end up paying is more directly tied to and dependent on your creditworthiness and budget as a consumer.
How are comparison rates displayed by lenders?
Under the terms of the Uniform Consumer Credit Code (UCCC), lenders are required to utilise a predetermined formula that gives buyers a clearer idea of the true cost of their loan. The idea is to protect consumers from loans that are advertised as significantly lower than those of competitors, yet are actually accompanied by outlying terms and conditions that significantly increase the buyer’s long-term payment obligations.
While there are a number of online comparison tools and home loan calculators at your immediate disposal, it’s simply good due diligence to ensure any lender offers thorough and complete information around comparison rates in the interest of making informed decisions,
What should dictate my decision as a buyer?
As with any major purchase, loan amount, term and rate should be guided primarily by a pre-established budget, and in the case of a home loan, your plans for the property itself. But specific to comparison rates, it’s also worth considering specific add-ons such as:
- Repayment frequency
- Monthly account fees
- Annual fees
- Valuation fees
- Mortgage documentation fees
This information is all designed to educate and assist consumers, so sifting through and applying it to the decision-making process is simply a prudent approach. For more information and guidance throughout the homebuying process, visit our site.