When considering apples and oranges, it doesn’t make sense to compare the two. To help make the process of finding the right loan easier, comparison rates have been created to ensure the advertised rates can be easily understood.
If you have been looking for the most cost effective mortgage product and you notice an advertisement.
It’s impossible to overlook the headline of ‘3.8% INTEREST!’ but, if you take a closer look, you’ll see the ‘7.9% comparison rate’ just underneath it.
What does this mean?
Customers can get a better understanding of the true cost of a loan if they use the comparison rate which includes all fees and charges associated with a home loan.
Even if a lender has the lowest rate, they may not be providing the most affordable loan, which is why it is beneficial to use a comparison rate.
To protect consumers from any potential confusion or misleading information when seeking a home loan, lenders are obliged to publish a comparison rate.
A comparison rate can be used by consumers to compare two similar products to an acceptable level of accuracy.
When holding two loan products side by side, it can be easier to compare them and determine which one is the more financially beneficial, even if one has a slightly higher interest rate with no fees while the other is a super-low interest rate with high fees.
Despite the fact that it is not always as straightforward as it seems.
The fees and charges associated with a loan, the rate at which the principal balance is paid off, and the total amount of interest charged over the course of the loan term all vary depending on the loan amount and its term, so it is important to look deeper into how the comparison rate is determined.
In order for the comparison rate to be presented as prominently as the interest rate on the advertisement, there must be a statement that clarifies the calculation of the comparison rate, such as ‘Comparison rate calculated on a loan of $150,000 for a term of 25 years, with monthly repayments’.
Should you require a loan of $900,000, the comparison rate for this loan will be considerably different when compared to other loans.
It is beneficial for borrowers to work with a broker to compare the comparison rate for the loan amount and term that is most similar to their own, in order to gain an understanding of the comparison rate that applies to their loan.
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