GUIDES & RESOURCES

What Is A Home Loan Comparison Rate?

Comparison rates for home loans can provide an indication of the total cost of a loan during its term, but there are other fees you may need to consider depending on your situation.

iSelect is the trading name of iSelect Mortgages Pty Ltd (ABN 86 148 217 181). iSelect Mortgages Pty Ltd is a credit representative (Credit Representative 400540) of Auscred Services Pty Ltd (Australian Credit Licence 442372). iSelect provides a referral to Lendi Pty Ltd ACN 611 161 856 (Lendi) who provides credit assistance. Lendi is a credit representative of Auscred Services Pty Ltd (ACN 164 638 171) (Licensee). iSelect Mortgages Pty Ltd receives a commission from the Licensee for each new customer account created and for each home loan submitted through this service.

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What is a comparison rate?

Lenders use comparison rates to help show the overall ‘lifetime’ cost of a home loan product. It’s a percentage rate that’s designed to give borrowers a more accurate picture of a loan's cost by consolidating both the interest rate and most fees.

But purely looking at the comparison rate on a home loan product won’t necessarily give you all the answers you need. This is because the rate is calculated on a hypothetical loan that might not necessarily bear any similarity to yours.

And if you’re just comparing interest rates alone, you won’t necessarily get a clear idea of the other fees that come with a home loan, which is where the comparison rate can come in handy.

To get a better estimation of your personal home loan costs, it may be more helpful to use a repayment calculator. You can start with iSelect’s mortgage repayment calculator here.

What do home loans typically feature?

The table below shows some common features of home loans, including the comparison rate.

Interest rate (per year)
  • The percentage charged by a lender on a borrower’s principal (the total amount of the loan).
  • Some home loans come with fixed interest rates (for a set period) or variable interest rates.
Fixed interest rate
  • Home loans with a fixed interest rate give you certainty over repayment amounts during the fixed rate period. So if interest rates increase, then your repayments won’t be affected during this period.
  • If you repay your home loan early, or refinance, then you may also need to pay break fees.
  • Offset accounts aren’t typically available for fixed rate loans.
Variable interest rate
  • Home loans with a variable interest rate can often come with:
    • Unlimited additional repayments
    • Unlimited redraw
    • Full interest offset.
  • Early repayment may come without any break fees.
  • Interest rates may decrease, but they may also rise, both of which affect your repayments.
Comparison rate (per year)
  • As mentioned earlier, this is a single figure of the ‘lifetime cost’ of the loan & includes the interest rate and most fees.
Repayment frequency
  • You could make repayments monthly, bi-monthly, fortnightly, or weekly. The type of frequency depends on your lender.
Application fee
  • This is usually a one-off payment when starting a loan. You might also see it labelled as an establishment, up-front, or set-up fee.
Ongoing fees
  • Some lenders add fees charged every month or year for administering a loan, which are also known as service, maintenance or administration fees.
Loan term
  • The length or ‘lifetime’ of your loan.
  • It’s worth paying attention to the loan term, because the longer it is, the more you’re likely to pay in interest.
  • Most loan terms are between 20 and 30 years.
Other loan features
  • Some home loans may have extra features that may or may not come with their own fees:
    • Offset account:
      This is a transactional account that’s linked to your home loan and can help you pay less interest. For example, if you have a $200,000 home loan with a $10,000 offset account, your lender will calculate interest based on a balance of $190,000 ($200,000 minus $10,000). Offset accounts can help you save money by reducing interest on your payments over the lifetime of your home loan. You can use the money in your offset account for everyday expenses, but it’s more effective at reducing interest if it has a high balance.
    • Redraw facility:
      This is the ability to redraw money you’ve paid above the minimum amount on your home loan (i.e. extra repayments). Any amount of money that’s in your redraw account means that you’re reducing the amount of interest you’d need to pay over the life of your loan because your loan balance has been reduced. You can withdraw money from your redraw facility which can be appealing for borrowers looking for financial flexibility. It can also be a good incentive for many people to better manage their finances and sooner pay off their home loan.
    • Line of credit:
      This can be a flexible way to access funds quickly via the equity of your home.

Are comparison rates compulsory? How are they calculated?

Comparison rates are now a legal requirement of lenders to display alongside their home loan products so that borrowers aren’t misled into taking on loans that they perhaps could not pay off in the long run. For example, a lender may have displayed a home loan with a very low interest rate to entice a borrower, but fail to clearly acknowledge other fees.

Comparison rates are typically calculated by lenders based the following factors:

  • A typical loan of $150,000.
  • A loan period/term/lifetime cost of 25 years.
  • A principal and interest loan.

What is not included in the comparison rate?

Some of the factors that aren’t included in calculating a comparison rate are listed below.

  • Government stamp duty
  • Conveyancing fees
  • Late payment fees
  • Break costs or early termination fees
  • Deferred establishment fees
  • Redraw fees
  • Any cashback offers if you’re refinancing

In most cases, at least one or more of these factors will affect the type of home loan you choose, and your ability to pay it off.

What’s the difference between the interest rate and the comparison rate?

The interest rate is the percentage that you will be charged on the amount of money you borrow, a.k.a: your total loan amount, or, the principal.

So each time you make a repayment on your loan, you will also be paying a small percentage of money on top of that repayment to your lender.

It’s important to remember that the interest rate doesn’t apply to every single fee against your loan. Your lender might also charge fees such as:

  • Account keeping fees;
  • Annual package fees;
  • Loan switch fees (if you choose to move between variable and fixed rates);
  • Rate lock fees (when you first take on a loan); or
  • Government fees and charges.

With that in mind, you can see that this is different to the comparison rate, which is a single percentage figure of a ‘lifetime cost’ of a loan that includes the interest rate and most fees. It can be a useful way to compare different home loan products in the market.

Tips for choosing a home loan

There are a few things you might like to keep in mind when comparing home loans.

  • Work out your budget and know what you can afford to borrow.
  • Remember that stamp duty isn’t typically included in the loan amount
  • Aim for the shortest loan term you can afford (to avoid paying more interest than you need to).
  • Aim for the lowest interest rate (just as long as the overall loan makes sense from a fees perspective). Don’t forget to consider possible interest rate rises.
  • Remember that mortgage features often come at their own costs.
  • Of course, compare home loans before you settle on one for you.
  • And remember, you can always refinance if you find a better offer the market down the track. iSelect has partnered with Lendi to make that process easier for iSelect customers!*

Where can I start comparing home loan options?

At iSelect we’ve partnered with Lendi to make it easier to find a great deal on your home loan.* Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.

Last updated: 6/12/2021

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