Explainer: Comparison Rates

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Comparing apples with oranges doesn’t make sense. To make finding the right loan easier, and to make advertised rates as transparent as possible we have comparison rates.  Great!  That should help, right?  Wrong!

You’re looking for the best mortgage deal and you see an ad. It shouts ‘3.8% INTEREST!’ and, underneath that seemingly too-good-to-be-true rate, ‘4.8% comparison rate’. What does this mean?

In 2003, an amendment was made to the Uniform Consumer Credit Code (UCCC) that required comparison rates to be included in advertising.  This change was made so that customers were not easily misled when it came to home loan interest rates. The UCCC has since been replaced by the National Credit Code and the comparison rate requirement remains.

A comparison rate is calculated on a loan of $150,000 for a term of 25 years, with monthly repayments. If your loan is going to be for $900,000 for a term of 30 years, the comparison rate for your loan will be vastly different. Furthermore, the comparison rate can also include upfront fees. Now, you don’t pay upfront fees in the 2nd year of having your mortgage, so why is this included in the comparison rate?

It’s designed to help consumers to compare apples with apples but nothing can do that better than a trusted mortgage broker.

Interest rates are important, but there’s more than that to paying off your mortgage faster.

 

 

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