Explainer: comparison rates

Comparing apples with oranges doesn’t make sense. To make finding the right loan easier, and to make advertised rates as transparent as possible, we have comparison rates.

 

You’re looking for the best mortgage deal and you see an ad. It shouts ‘3.8% INTEREST!’ and, underneath that seemingly too-good-to-be-true rate, ‘7.9% comparison rate’. What does this mean?

Because a comparison rate includes all of the fees and charges that can be applied to a home loan, it helps to show customers what the true cost of a loan is. In some instances, lenders offering the lowest rate may not actually boast the cheapest loan, which is what a comparison rate shows,” explains Mortgage Choice Head of Corporate Affairs, Jessica Darnbrough.

“In 2003, an amendment was made to the Uniform Consumer Credit Code (UCCC) that required comparison rates to be included in advertising. This change was made so that customers were not easily misled when it came to home loan interest rates.” The UCCC has since been replaced by the National Credit Code and the comparison rate requirement remains.

This allows consumers to compare apples with apples, to an extent. It does make it much simpler to hold two loan products side by side and, regardless of whether one has a slightly higher interest rate and no fees while the other is a super-low interest rate with high fees, see at a glance which one is the better deal financially.

However, it isn’t always this simple. Fees and charges, the rate at which principle is paid down and the total interest paid over the loan term all change depending on the loan amount and on the term, so you need to delve a little further into how that comparison rate is calculated.

While the comparison rate itself must be as prominently displayed as the interest rate – not buried in tiny fine print – somewhere on the advertisement, there will be a statement along the lines of ‘Comparison rate calculated on a loan of $150,000 for a term of 25 years, with monthly repayments’. If your loan is going to be for $900,000, the comparison rate for your loan will be vastly different.

In order to get an idea of the comparison rate that applies to a loan, it is a good idea for borrowers to look at the comparison rate for the amount and term closest to the amount and term of their loan,” Darnbrough suggests. It is always a good idea to look at a comparison rate that is specific to their circumstances, otherwise they can be misled.

As an MFAA Approved Finance Broker who can help you make sense of advertised interest rates and calculate comparison rates for your specific circumstances. Contact us now

Explainer: The home loan approval process

Following the lodgement of a home loan application, hopeful borrowers are often keen to know what will happen next and how long it will take for them to receive the verdict. The bad news is that there is no one-size-fits-all answer. The good news, however, is that a solid application is the key to keeping the approval time short.

 

The amount of time it takes for you to receive a response to your home loan application can vary. An answer is usually received between two days to two weeks, depending on a range of factors.

“For a reasonably straightforward application, it’s 48 hours to a final approval. But, depending on how complex the circumstances are, it can take longer than that,” explains Aussie General Manager Strategy and Product David Smith.

Before offering conditional approval, your potential lender will need to make an assessment of your application and conduct a valuation of the property. Of course, having a valuation that is acceptable to the lender done in advance will expedite the process.

“With valuations, the intention is to support an application rather than to make or break it,” Smith says. “There are a few things that can result in an application not being approved based on valuation, like zoning, property size, or if the condition of the property is poor enough that major repairs would be required before it could realise its market value.”

The lender will also assess your capacity to repay the loan amount you have requested. This is where all of the information about your salary and liabilities come into consideration, and where accurate and complete information is essential.

“The credit review by the lender can include a bit of to-and-fro between the customer, the broker and the lender due to the lender’s request for further information as that credit review takes place,” Smith says.

Your potential lender makes an overall judgement of you as a borrower and the complexity of your financial history will affect how long this takes.

“It’s best to be full and frank in disclosure from a borrower’s perspective. The biggest red flag is non-disclosure of liabilities or adverse information on a credit history, whether it is included in documentation or not,” Smith says.

“The complexity of the application process is a great reason why you would sit down with a reputable broker, as they can just explain all of that to you.”

Following the submission of an application, you can expect us to be in touch with you to update you on progress, and to notify you of the outcome. If your application is approved, we will also advise you of when to expect a formal letter of approval from your lender.

Explainer: how RBA rate changes affect your interest rate

When the interest rate on your home loan fluctuates, it can feel as though you don’t have control of your debt. Despite being frustrating, interest rate changes are a part of every loan’s lifespan and warrant your consideration.

The interest rates that banks charge on their home loans are influenced by the Reserve Bank of Australia’s (RBA) cash rate.

The cash rate is reviewed by the RBA on a monthly basis in order to safeguard Australia’s economic stability. The cash rate is the rate charged on loans made between the RBA and your lender. This, in turn, has a very strong impact on the interest rates your lender charges you.

“The RBA supports the banks with liquidity facility,” explains Advantedge General Manager Brett Halliwell. “The RBA is a bank to the banks. The cash rate is effectively the rate at which the RBA will lend to the banks, and what the banks effectively use as a reference rate for other things.”

When the cash rate is changed by the RBA, lenders decide whether or not to mirror the new rate in the interest they charge their mortgagees.

This is entirely up to the lender in question and depends on the market and how the lender is performing at the time of the cash rate change.

“If you look at the mortgage market, specifically by itself, it is very competitive,” Halliwell says. “It is about the lender trying to get the right outcome on the deposit side of the balance sheet within the context of a very, very competitive marketplace, but recognising that a reference rate has changed and, therefore, looking at where they stand.”

Some lenders choose to shift their interest rate changes higher than the RBA’s cash rate change and, in these instances, other lenders may be offering lower interest rates than the one you currently have.

Keeping track of how your lender manages cash rate changes and where that leaves you as the person paying the interest can be time consuming, and is made more difficult by fees, charges and the flexibility offered by different loan products, which all need to be weighed alongside the interest rate.

A simple way to regain control of your interest rate is to lock it in for a period, if you believe rates are not likely to fall further. Fixed rates offer less flexibility, but more certainty.

As an MFAA Accredited Finance Broker I am familiar with the different lenders and their responses to cash rate changes, and can track interest rate fluctuations across a panel of lenders to ensure you’re getting a great deal.