It is compulsory for lenders to advise and promote "comparison rates" for home loans and personal loans.
Comparison rates are based on the average annual percentage rate. The comparison rate is calculated by wrapping-up interest payments, fees and expenses into one figure and converting it into a percentage rate.
The comparison rate is designed to reflect the total annual cost of a loan to a borrower and helps us to work-out the 'true' cost of a loan and make an informed decision about which product is best for us.
A comparison rate:
- Addresses interest costs and the known upfront and ongoing fees but not early repayment fees or government charges
- Does not include repayment flexibility, redraws and offset accounts which vary widely among loans and can reduce costs significantly
- Is best calculated and quoted specifically for the amount and term of you loan - especially for fixed rate loans
- Can be misused by lenders who advertise a loan with a low comparison rate – but the loan is not convenient or practical
There are many different loan types available. An example of a non-standard loan is one that offers an introductory rate for the first 12 months, the rate then reverts to a higher rate thereafter. Some loans offer a lower interest rate for the life of the loan but will include high monthly or annual fees.
You should also be aware that interest rates should not be the sole decisive factor when choosing a loan. Some loan products offer offset and redraw facilities at no or little cost whereas others can charge $400 or more to redraw on your loan.
The above advice has been prepared without taking account of your objectives, financial situation or needs. You should consider the appropriateness of this advice. Before making a decision to acquire a financial product you should obtain a Product Disclosure Statement.
Brett Hall is a Director of local professional services firm Pritchard & Partners. Ph 4920 2877.
