While just about every home loan comes with a quoted interest rate attached, each borrower is usually interested in choosing a loan that is reasonably priced and convenient to repay.
Logically, to get such mortgage loans, borrowers must compare interest rates before they can select the most ideal one for their circumstances. In the process, they are met with two confusing terms, namely: the mortgage comparison rate and interest rate comparison when they try to compare loans. So, what do the two expressions mean and how can they help home buyers to get the best deal on their mortgage?
Usually, lending laws obligate lenders to publish the comparison rates of their loans when they undertake loan interest rate advertisements. Nevertheless, even with the comparison rate publications, many borrowers rarely examine the loan beyond the advertised interest rate and don’t take into consideration the other costs of their mortgage loans, such as fees and extra charges, when they do an interest rate comparison.
This is important, because the lender deducts all fees and charges directly from the customer’s loan account and immediately the interest rate clock starts adding up on those new charges.
a. The term of the loan;
b. The amount of the loan;
c. The interest rate on the loan;
d. The loan repayment frequency; and
e. All charges and fees associated with the loan.
Indeed, the comparison rate is a comprehensive account of all the critical factors that determine the total cost of a home loan. However, when comparing the costs of different loans, it is prudent to dig deeper than the comparison rate by examining every single feature of each loan. This way, a clearer picture and insight into all possible combinations of the terms and amounts of the loans can be deeply appreciated.
For instance, if a loan advertisement reads: comparison rate 5.28% (calculated using a loan of $150,000 for 25 years), Variable interest rate 4.95%; it presents a loan interest rate which is slightly lower than the indicated comparison rate in order to illustrate that the true (comparison) rate has factored in other critical costs.
Moreover, the comparison rate of 5.28% given on the loan is only the true cost of that particular loan and would completely change in the case of a different loan size such as $400, 000, or a different loan term, such as 30 years.
Likewise, borrowers should not be confused by comparison rates for fixed loans, such as a comparison rate of 5.24% for a 4.75% fixed interest rate. In this latter case, the comparison rate has been based on the true full term of the fixed loan, often 30 years, and so it should not mislead the borrower.
1. Early termination fees like fixed-rate loan break costs
2. Government and statutory fees, which are typically standard regardless of the lender or the type of loan
3. Charges or fees that are based on future occurrence, such as re-draw fees or any penalty fees.
For instance, by excluding attractive benefits such as flexible repayment periods, the option to make extra repayments, 100% offset account and re-draw, the comparison rate falls short of giving an all-embracing picture on which to base mortgage loan comparisons and choices on. Nevertheless, it is more reliable than simply using the loan interest rate.
Seeking out the help of a professional mortgage broker can be an immense advantage when trying to analyse the comparison rate of a mortgage.
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