What is a Comparison Rate?

Find out more about comparison rates and why they’re important to compare right here with Savvy.

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, updated on August 7th, 2023       

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When it comes to finding the right home loan for you, one of the first features you’ll encounter on any lender site or comparison service is the mortgage comparison rate. It’s important to understand what this is and how it works as, in many ways, it can hold the key to saving you money on your home loan. Read more about what the term “comparison rate” means and find the best comparison rate home loan by comparing with Savvy.

What is a home loan comparison rate and how does it work?

A home loan comparison rate is a percentage figure shown alongside interest rates by lenders. While the interest rate is reflective of only one cost (interest), a loan’s comparison rate accounts for a combined figure of a loan’s interest rate and fees. This is crucial to be aware of when comparing home loans, as this rate is a more accurate reflection of the cost of the mortgage overall.

For instance, you may decide to go for a home loan with a 2% p.a. interest rate to help you save, but fail to account for the fact that its various fees add up to an equivalent 2.5% p.a., meaning the comparison rate would be around 4.5% p.a. In contrast, a loan with a noticeably higher interest rate of 3% p.a. may end up being cheaper for you if its fees only equate to around 0.5% of the loan amount, resulting in a comparison rate at a full percentage point lower at 3.5%.

Apply these numbers to a $500,000, 30-year home loan with monthly repayments and the results are stark: you’d save over $100,000 in interest and fees by opting for the loan with the lower comparison rate.

What costs are included in a comparison rate?

There’s a range of fees which are included in a home loan’s comparison rate, all of which are important for you to know before signing up for your mortgage. These include:

  • Interest: the most substantial cost in relation to home loans, interest is charged based on your outstanding principal, meaning the larger your loan debt, the more interest you’ll pay.
  • Establishment fee: otherwise known as an establishment fee, this is charged to cover the cost of opening and setting up your loan account. They range in price from around $150 to $700, although an increasing number of lenders will waive it entirely.
  • Ongoing monthly/annual fees: depending on the home loan you take out, you’ll either have to pay a monthly ($5 to $20) or annual ($300 to $400) service fee. Like establishment fees, it’s common for lenders to waive these also.
  • Valuation fee: this fee is charged to cover the cost of having your proposed property valued by an independent valuer, which helps inform your lender’s decision on what amount to approve you for. These typically fall in the range of $100 to $300.
  • Legal fees: legal fees are charged to help cover the cost of your lender’s legal team, which is required to prepare your final loan contract. These charges can range from over $100 to around $400, although they can vary quite significantly between lenders.
  • Settlement fee: once you’ve repaid your home loan in its entirety, your lender will charge you a fee to cover the administrative costs of closing the account. In most cases, this will range from around $300 to $500.

As important as it is to know what’s included in your comparison rate, it’s just as important, if not more so, to have an idea of which charges aren’t included. Some of these are:

  • Stamp duty: the most expensive fee you’ll encounter is charged by your state or territory government, not your lender. The cost of stamp duty varies quite significantly between states, but you’re likely to be required to pay between $15,000 and $30,000 on top of your home loan, if not more.
  • Mortgage registration fee: another state government charge which is levied to cover the cost of registering your property as security for your home loan. It’s a flat fee which will cost between $100 and $200, depending on where you live.
  • Early repayment fee: if you pay out your home loan ahead of schedule whilst under a fixed interest rate term, you’re liable to pay an early repayment fee. This charge will be based on the size of your loan and the amount of time left to run at the point of repayment.
  • Late repayment fees: as the name suggests, these fees are charged if you submit a payment behind schedule, usually by five days or more. This can cost you up to around $50 per late repayment, which will continue to be charged until you pay your loan.
  • Redraw fees: if your home loan has a redraw facility (which most do), you may be charged a nominal fee each time you withdraw from your previous additional contributions. However, many lenders won’t enforce this fee.

How is my home loan’s comparison rate calculated?

While comparison rates can seem like a relatively long and complicated process, this isn’t really the case. Fortunately, you can use Savvy’s home loan comparison rate calculator to crunch the numbers on what the comparison rate will actually be on your personalised home loan (and how much it’ll cost you overall).

In terms of how a comparison rate is calculated, each rate is based on the same metric to ensure you as a borrower can compare apples with apples. Whenever you see a comparison rate listed on a home loan offer, this is calculated based on a $150,000 mortgage repaid over 25 years. It’s important to know this, as the comparison rate you see on your ideal lender’s site may not be reflective of the loan you’re eligible to apply for. That’s why it’s important to calculate this rate yourself or seek out pre-approval to get an idea of an indicative rate.

Top tips for reducing the cost of your home loan comparison rate

Compare as many loans as you can

Perhaps the simplest way to find the best comparison rate home loan is to survey the market as closely as possible before you apply. By comparing home loan options with Savvy, you can set yourself up to make the most informed decision on which mortgage will cost the least overall.

Fix your interest at a low rate

If interest rates are at a significant dip and are projected to rise, you can benefit from locking them in for up to five years at their reduced rate. This can save you a meaningful amount overall. Contrastingly, though, you should leave your rate variable if interest is high and set to fall.

Make additional repayments

By reducing your outstanding loan debt at a faster rate, you can slash the amount of interest you’re set to pay on your home loan by tens of thousands of dollars. This also applies to loans which come with ongoing fees, as reducing the term will also cut down on the total cost of these charges.

Utilise an offset account

If your loan comes with an offset account, you can potentially save yourself a significant amount of money. This is because any funds deposited into this account are subtracted from your loan principal interest-free. An offset account will also help you pay off your loan sooner.

Common questions about comparison rates answered

If I have a home loan with honeymoon interest, will the comparison rate include the revert rate?

Yes – comparison rates do include revert interest wherever applicable. Honeymoon rates, or introductory rates, are common on home loans and can help borrowers save in the opening 12 to 24 months of their loan. However, the revert rate is a relevant consideration, as these may be less competitive when compared to other loans. Comparison rates will account for this in their calculations.

Will my credit score impact my comparison rate?

It may – because home loans are a type of finance which uses a high-value, sellable asset as collateral, your credit score generally isn’t a major factor for your lender when assessing your application. However, if you do have a bad credit score and recent defaults which may be cause for concern for your lender (or have recently been bankrupt), they’ll either increase your rate and charge more fees to compensate for the increased risk or simply reject your application outright.

Will my payment frequency affect my mortgage’s comparison rate?

Yes – more frequent repayments will result in a decrease in the overall cost of interest on your mortgage. This is because interest is calculated daily, meaning the faster your loan debt falls, the faster the interest you’re charged will decrease in equal measure. For instance, a $500,000 home loan repaid over 30 years at 3% p.a. comparison would cost almost $35,000 less when paid on a fortnightly basis compared to monthly.

Are comparison rates on other loan types calculated in the same way?

Yes – comparison rate is the term used for any loan repaid with interest and fees as a way for consumers to compare their overall cost more accurately. A car loan, for example, will always have a comparison rate which accounts for its interest rate and the various fees which are charged on the deal. Other loans’ comparison rates are also calculated based on a consistent metric, so you should always ensure you know what this is before diving into the application process, as you may find your rate is higher than what was indicated.

Will additional loan features increase my comparison rate?

They may – some lenders charge a small premium for features such as offset accounts and redraw facilities, which is usually represented as a fraction of its percentage. However, the potential for savings with these features is often far greater than what they may cost in interest, so it’s almost always worth securing a home loan with useful additional features.

Do larger loans come with lower comparison rates?

They can – because larger loan debts will naturally accrue more interest, some lenders will offer discounts for mortgages which fall in their overall price range. They’re willing to do so due to the fact that even with a reduced rate, they’ll still earn more interest from the borrower than they would on a smaller loan. This is why your comparison rate may be lower on a greater loan sum, so you should bear that in mind when approaching the comparison process.

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