What is a comparison rate?
Designed to help you compare loans with hidden fees, or that ultimately aren't as good as they appear, a comparison rate was created to average out all the stuff you HAVE to pay for that’s directly related to the loan.
So, if the loan (for example) had a super low 'honey moon' rate and then jumped up the comparison rate would average these interest charges and it would be glaringly obvious the loan was not as attractive as first thought - and this type of loan has largely disappeared as a result.
Similarly a loan with high fees that are charged to the loan has these averaged out and added to the interest to come up with a new % rate, reflecting the true cost of the loan. But here's the snag - it can’t take into account redraw and incidental fees, because noone has any idea how often you might need these - and - some sneakier lenders have gone around this by charging the fee to a (compulsory) account taking the sting out of the intent of the comparison rate.
The legislation is also designed to meet certain criteria so you’re comparing apples with apples, but the criteria doesn’t match a typical loan either, making it further meaningless to you. What I mean by this is it’s based on a $150,000 loan over a 25 year term which is not your average loan anymore.
By and large these are not really an effective measure of the true cost of the loan anymore, but luckily our broker software makes it super easy for us to sum all of the necessary charges for you and point out which features you might have to pay for here but not there.
For example if you’re the type who like to build up redraw with all of your savings and then regularly pull it back out – which is not necessarily a bad strategy – the comparison rate doesn’t tell you which loan has a $50 per redraw fee and which is free online. It also doesn’t go to ATM fees and the ATM network at your disposal. Knowing a bit about your banking and adding our software full comparisons effectively makes a super comparison that we rate much higher than the legislated comparison rate calculation.
Article in the Western Weekender