Comparison rates take the hard work out of comparing the cost of different loans. While normal interest rates only take into account the interest payments, comparison rates also take into account the bank's fees and charges.
Comparing home loans
When you take into account loan term, interest rate, application fees, package fees, monthly/annual fees and your mortgage payment, its almost impossible to compare two different home loan offers.
For example, if you were comparing two different banks and one has a lower rate than the other, you'd pick the lower rate right? Not necessarily. See the bank with the lower rate might have large upfront/application fees, monthly "account keeping fees" and/or annual "package fees". So although the mortgage payment may be lower, once you take into account all the fees you have to pay, you may be better off choosing a loan with a slightly higher rate but no fees.
How to use comparison rates
A comparison rate is usually worked out using the example of a loan of $150,000 over 25 years. Obviously if you are borrowing more, or your loan term will be longer, the comparison rate you'll be paying may be different, so you can't use it to work out how much "you are really paying". But what a comparison rate does is standardise every home loan product you are comparing so, finally, you can compare applies with apples.
Where to from here?
Comparison rates are only one thing you should be considering when comparing home loans. For example, if one lender has a slightly higher comparison rate (meaning more fees) but offers an offset account, it may be worth paying slightly higher fees and using the offset account to save way more in interest. For more on what an offset account is and how you can use it to save thousands, click here.
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