Failed attempt to simplify home loan product comparison
Comparison rates were a good idea but as so often happens, poorly implemented. As a result they were often manipulated by lenders and caused confusion for borrowers. It is obviously in the borrowers interest to have a standard method for loan comparison however it was never in the lenders interest to make it work. Of course they obeyed the law but they only did what they had to. Originally many lenders used other methods to hide fees and some still do. They also set out to generally confuse borrowers with an overload of information. Where as today you are doing well to find any kind of detailed explanation of how the comparison rate is calculated… which I guess is why you came to this page. We have an MFAA approved comparison rate calculator at the bottom of this page.
What do comparison rates tell you?
Comparison rates are supposed to take into account all establishment costs, ongoing fees and mortgage discharge costs and provide you with a realistic result that you can use to compare one loan against another. However in many situations, particularly fixed interest rates the result is irrelevant or in some cases idiotic – and unless you really understand the how the calculation is based then the results are often useless for comparison purposes.
Why has this happened?
Legislation almost always has loopholes and so for example lenders often don’t include annual package fees that are instead charged to your credit card … and at $395 pa that can make quite a difference on a $250,000 loan. Comparison rates are almost always quoted on the basis a “standard loan” even though the legislation doesn’t state what the standard should be. An average example would be a loan for $150,000 over a 25 year term. That may sound reasonable however an application fee of $600 when considered over 25 years has little impact on the comparison rate however most people will refinance or change their home loan every 5 to 7 years and $600 over 5 years on a $150,000 loan makes a noticable difference. Therefore a comparison rate is only accurate if you personally calculate it for your specific loan size and over the period that you expect to have the loan- the comparison rates quoted on web sites may bear no resemblance to the real outcome for your situation.
When it comes to fixed interest rate home loans a standard comparison rate is pointless. When a fixed rate period is over your loan typically reverts to the standard variable rate which is much higher than the real rate everyone pays. Even if you have a package discount this usually cannot be taken into account when calculating the comparison rate and so despite the reality where almost all people who fix will review their loan at the end of the fixed rate, the comparison rate does not take this into account. Most borrowers will consider fixing the rate again or switch to a discounted variable rate to or refinance to another lender. Yet on a 3 year fixed interest home loan the Comparison Rate is actually calculated over the entire loan term typically 25 years with 22 of those years at the full highly inflated standard variable – which would be an idiotic outcome for any borrower.
True cost of loan comparison
In 2011 the regulators removed the requirement for mortgage brokers to provide comparison rates – it is only a matter of time before the entire concept is scrapped or fixed. In an effort to provide our clients with an accurate comparison of home loan products we came up with the Actual Cost of Loan comparison whereby we take a loan term that is decided by our client, normally 5 years and then compare the actual dollar costs including all establishment costs, ongoing fees and exit costs. This shows in simple dollar terms how much one loan will cost compared to another and we believe that is a true home loan comparison. However since there are simply too many possible variations to consider we have not tried to present this in an online calculator – they simply can’t take everything into account. So we prepare our home loan costs comparison based on your individual circumstances taking into account your existing arrangements, your preferences and our own advice. We can compare two loans or two hundred loans if that is what you really want, but in reality we usually take the top 10 products and then it simply a case of you deciding which features are worth any extra cost and you can tell exactly how much the extra cost or the savings will be. Simple, accurate and a true mortgage cost comparison .
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