How to REALLY compare home loans
When selecting a home loan, it’s essential to understand how much a loan could cost you each year, particularly when comparing different loans.
The interest rate isn’t the only cost
The interest rate you pay on a home loan may be just one of the costs you’ll wear.
Home loans can come with a variety of fees and charges. And what seems like a low rate loan can come with a range of other fees and charges such as application, monthly or annual fees, that can add to the loan cost.
Looking beyond the advertised rate is also important. Consider the example of a fixed home loan. A fixed home loan offers you the certainty of your rate not changing for a term, before it reverts to a different variable rate. Be sure you understand what rate your loan will go to once the fixed period is over unless you plan to sell your home, refinance or choose another product.
It’s not just about the potential to pay more on your home loan than expected. The different fees charged by some lenders (as well as features) make it difficult to make an apple-for-apples comparison between loans offered through different lenders.
The comparison rate –the ‘estimated’ cost of a loan
Whenever you see a home loan advertised, you’ll find two rates displayed – the interest rate and the comparison rate.
The comparison rate is so-named because it is designed to let you compare the overall costs of different loans, assuming the same loan amount and term. It does this by taking into account the interest rate plus any loan fees and charges you’ll definitely pay and presenting it as the equivalent interest rate.
The comparison rate includes upfront costs including loan establishment fees plus valuation fees as well as ongoing loan costs – typically any fixed monthly or annual loan fees.
However, it’s important to note that the comparison rate is an estimate only based on a loan of $150,000 over 25 years.
Why is the comparison rate only based on $150,000 over 25 years?
There is a slight hitch with comparison rates. As we’ve noted, the comparison rate usually has an asterisk attached.
If you’ve ever tracked the asterisk to a lender’s fine print, you’ll notice that the comparison rate is based on a loan of $150,000 repaid over 25 years.
For today’s home buyers, a mortgage of $150,000 is very low. However, these figures date back from the mandatory introduction of comparison rates back in 2003.
It may not provide a modern basis of comparison but that’s where the next step in the puzzle comes in – home loan key facts sheet.
Home loan key facts sheet – a handy resource
Home buyers have another tool available to compare between lenders.
Back in 2011, the Gillard government made it a requirement for lenders to provide customised home loan key facts sheets.
These facts sheets give borrowers a simple, one-page information sheet, which use standard definitions to show consumers how much they will pay every month – and over the life of their loan, and where they can shop around.
Home loan key facts sheets let home buyers make a side-by-side comparison of the cost and features of different home loans to see how much they could save with various mortgages from different lenders.
The benefit of a Home Loan Key Facts Sheet is that it will show you your personalised comparison rate, which is the actual comparison rate for your loan amount and desired term instead of the standard ‘$150,000 over 25 years’.
The facts sheet can also tell you how your repayments will change after a fixed period, what your repayments would be if your interest rate increases by 1.00%p.a. and how much you’ll pay back for every dollar borrowed. This information lets you genuinely compare apples with apples when comparing home loans and is far more helpful than a comparison rate.
The bottom line
The upshot is that if you are in the market for a home loan – either as a first home buyer, investor, refinancer, or if you’re upgrading to your next home, the comparison rate coupled with home loan key facts sheets, are tools worth making use of.
You could find that a loan which seems to offer good value can prove surprisingly expensive once you’ve added in any loan fees.
For more information – or to generate a home loan key facts sheet for a Community First home loan, click here. Or just head to one of our stores to speak to a Community First team member about the home loan that’s right for your needs.
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