You’ll usually see two interest rates on a home loan product: a nominal rate and a comparison rate. It’s important to understand the difference between the two. The nominal rate is the lower of the two rates because it doesn’t include the cost of the loan’s fees and charges. It’s only the interest rate on the loan. The comparison rate, on the other hand, is the higher of the two rates because it includes all of the loan’s fees and charges. It reflects the “true” cost of the loan. Lenders are legally required to display the comparison rate on all of their loan products. As the name suggests, you should always use the comparison rates when comparing different loan products. When you do, you’re comparing all the costs associated with the loan, not just interest.

Example

For example, let’s say you’re comparing the following advertised rates from three different lenders:

• Lender A: nominal rate 5%, comparison rate 6%.
• Lender B: nominal rate 4.75%, comparison rate 5.75%.
• Lender C: nominal rate 5.25%, comparison rate 5.5%.

Lender B has the lowest nominal rate of the three lenders, so you might naturally assume that loan will cost you less overall. But it won’t. Lender C has the lowest comparison rate, so their loan will be the cheapest. Let’s assume though that you didn’t understand the significance of comparison rates and chose Lender B instead of Lender C, mistakenly thinking that you’ll end up paying less. According to the most recent figure from the Australian Bureau of Statistics, the average Australian home loan is $388,000. If you take out a mortgage of that size over a standard 30-year term with monthly repayments, here’s the total amount you’ll pay in interest, fees and charges with Lender B compared to Lender C.

• Lender B: $344,280
• Lender C: $326,798 (that’s $17,482 less than Lender B)! [i]

So, although it might not sound like much, even a quarter of a per cent difference in comparison rates can make a significant difference to the amount you’re charged over the life of your home loan.

Examples of fees that lenders might charge

Lenders can potentially charge a range of fees that will add to your overall repayments. Examples of those charges include:

• Loan establishment fees.
• Ongoing loan administration fees.
• Fees for optional loan features, such as redraw facilities or offset accounts.

How we can help

There’s an old saying that “you don’t get what you deserve, you get what you negotiate”. Many home loan fees and charges are negotiable. At Fast Repay Home Loan, we can help you to negotiate loan fees and charges with your lender as part of your application. Once your loan is approved, we can also help you to implement strategies so you can become debt-free and own you your home as soon as possible. Whether you’re looking to take out a home loan or to refinance, we’ll take the time to understand your needs and goals so we can provide you with the best possible advice. Call 1300 707 955 or email info@fastrepayhomeloan.com.au/backup to find out how we can help you, and to secure your free consultation with one of our finance experts.   [i] https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-much-will-my-repayments-be