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Comparison Rates - How do they help you ?
The Comparison Rate on a mortgage is higher than the interest rate
because the Comparison Rate takes into account some of the costs that you pay
when getting the mortgage.
A comparison rate is a tool to help consumers identify the true cost of a loan. It is a rate which includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure. For example, a bank’s advertised interest rate may be 5.49% and its comparison rate 6.75%.
How is a comparison rate calculated?
Comparison rates are calculated in accordance with a standard formula, which takes into account:
• the amount of the loan;
• the term of the loan;
• the repayment frequency;
• the interest rate; and
• the fees and charges connected with the loan, except for government charges, such as stamp duty or mortgage registration fees; fees and charges which may or may not be charged, because they depend on some event which may or may not occur (for example, fees for early repayment or redraw fees); and fees and charges which are not ascertainable at the time the comparison rate is provided.
Comparison rates in advertisements
As different loan amounts and terms produce different comparison rates, comparison rates in advertisements must be based on the amount and term in a legislated standard list that is most typical of the loan being advertised.
Comparison rate schedules
A comparison rate schedule is a list of comparison rates for a range of standard loan amounts and terms for a particular credit product.
The standard amounts and terms have been set in legislation and a comparison rate must be provided for all of the listed amounts that are generally available for that credit product.
As they use the same loan amounts and terms, comparison rate schedules can be used to compare the comparison rates of different credit products.
Comparison rate schedules must be made available at any premises of a credit provider, finance broker or linked supplier at which consumer credit products are advertised or at which members of the public can lodge credit applications in person.
A relevant comparison rate schedule must also accompany any credit application that is sent or given to you by a credit provider, finance broker or linked supplier.
Points to remember when using comparison rates
A recent study by a leading industry researcher revealed inconsistency by lenders in the calculation of comparison interest rates, a measure mandated by law and intended to aid prospective borrowers in comparing home loan products. The researcher said while some lenders applied the spirit of the law to their comparison rate calculations, other lenders used a liberal interpretation. These latter lenders do not properly account for all fees relevant to taking out a loan.
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review and approval. Properties and vehicles securing all loans must be located in Australia.