If you’re researching home loans at the moment, you certainly wouldn’t be the only one and might come across something called a comparison rate. Homeowners who have happily paid their mortgage for years are now realising that better deals might be out there. With interest rates rising along with other cost-of-living pressures, people need to ensure they’re getting value for money.
In many cases, people are considering refinancing with a different lender to get a better deal. Home loan products change with time, so the features available now may not have been common when people first bought their homes.
One of the things to consider when refinancing or buying your first home is the comparison rate. Let’s take a deeper look at what it is and how it all works.
So, What is a comparison rate?
Comparison rates are used to compare like-for-like home loans. When we say ‘like-for-like’, we mean that the comparison rate can only be used on fixed-term home loans. Other types of mortgages have too many variables for a comparison rate to work accurately.
Rather than being an actual interest rate, they take into account a range of factors to calculate the total cost of a loan over a specific period. So, it’s an easy way for borrowers to see which loan will leave them better off.
For example, a home loan with a low interest rate may still have a high comparison rate if the fees and charges are higher. On the flip side, a loan with very few fees may look attractive, but the interest rate could be higher. Comparison rates tell you which one is really best in the long term.
What do comparison rates take into account?
When developing a comparison rate, several factors are considered. Common factors that influence a loan’s comparison rate include:
- Amount of the loan
- The loan term
- Repayment frequency
- Fees and charges
- Interest rate
All of these factors are considered to come up with an overall comparison rate that gives you a better indication of which loan is right for you.
When to consider comparison rates
There is basically no bad time to look at the comparison rate for home loans. There are two major reasons you would look at the comparison rate, and those are:
- Buying a home and looking for a mortgage provider
- Considering refinancing your home loan for a better deal
A comparison rate is a useful tool for both situations because you’ll be able to carefully determine which loan is the cheapest overall.
However, bear in mind that the comparison rate is used to determine the overall cost of a loan. The cheapest long-term loan may not suit your individual needs and financial goals right now. That’s why it’s always worth consulting a professional broker before jumping into any new home loan.
For example, you might find a home loan with a great comparison rate. It will save you money over 30 years. But let’s say you want to start a family soon. Or you’re saving for a holiday. If you need more money free for other things right now, then the best loan will be one that ensures lower repayments in the short term. Whether that’s an interest-only loan or a fixed-rate loan that switches to variable in a few years – there are several examples out there.
Is a comparison rate foolproof?
As you can see, personal circumstances, financial goals, family goals and all other aspects of life can influence your choice of home loan. So, in that sense, comparison rates isn’t foolproof. If it was, everybody would rush to the loan with the best comparison rate and all other lenders would collapse. (A bit extreme, but you get the point.)
When looking at comparison rates, always read the fine print because that tells you everything that the rate takes into account. Home loans have various features such as offset accounts, so you need to consider all of those other aspects when deciding on the loan that’s right for you.
Contact BrokerCo for help
If you’re buying your first home or considering refinancing your home loan, the best thing you can do is contact BrokerCo. Our service lets you easily compare loans and comparison rates online. However, although we offer an online service, we also provide you with a real broker to discuss your individual needs and financial goals. With this information, our professional brokers can find the best home loan products on the market and even help guide you through the application process.
So, if interest rate pressures have got you down, it’s time to start shopping around. Let BrokerCo help you save potentially thousands over the life of your mortgage.
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