Mortgage Broker – Established Residential Investment & Home Loan Specialist

Comparison Rate

Comparison Rate – What is it?

 

What is a Comparison Rate?

Under the NCCP (National Consumer Credit Protection) it is now by law that whenever an Interest Rate is advertised it has to be accompanied with a Comparison Rate.

The Comparison Rate includes all of the fees and charges from a lender associated with the product selected, including any set fees for the duration of the loan (over 30 years). These costs are then turned into a percentage and added on top of the actual Interest Rate.

 

Comparison Rate – Type of Fees

 

The standard fees that are added to the Comparison Rate are things like:

  • Lender Application Fee
  • Valuation Fee
  • Document Preparation Fee
  • Title Insurance
  • Settlement Fee
  • Settlement Disbursement Fee
  • Monthly Fee
  • Annual Fee
  • Discharge Fee

The interesting thing is that the only fees the lender has to incorporate into their Comparison Rate are those that will definitely be charged and the amount is set for the life of the loan.

So every lender has a Discharge Fee, for example $300 but to discharge the lender requires solicitors to prepare the discharge paperwork and then have someone attend the settlement. The amount that a solicitors office charge for this service today will obviously be different in 30 years time, therefore it would be unrealistic to include these type of fees into the comparison rate…

 

Comparison Rate – Confusion

 

Personally I believe the Comparison Rate is a good thing but I can clearly understand why potential clients are confused about what it really means.

I have see CBA in the past advertise a comparison rate that was identical to the interest rate but charge an Annual Fee. I don’t know how or why but they charged the Annual Rate to the clients Savings Account, instead of charging it to the loan account. Does this mean they don’t have to add it to the Comparison Rate???

Whenever a Comparison Rate is advertised it should detail the exact calculations and detail the actual fees that are incorporated into the calculation but I doubt this will happen because there are too many variables.

For example, what about the State Revenue Department Fees?

Currently in WA, the cost to Register a Discharge is $160, to Discharge a Mortgage is $160 and to register a new Mortgage is $160. Therefore when refinancing you will be charged $480 from the State Revenue Department.

A lender doesn’t add this into the Comparison Rate because if you refinance a loan with the same lender, you don’t have to refinance the Mortgage, therefore these fees are not applicable.

 

Comparison Rate – What to Look For

 

The main factor that makes a Comparison Rate vary a lot from the actual Interest Rate is Ongoing Fees, either monthly or annual fees.

Everyone who has a Professional Package pay an ongoing Monthly or Annual Fee, the banks call them different names, for example:

  • NAB – Choice Package – $395 annual fee
  • CBA – Wealth Package or MAV Package – $395 annual fee
  • Westpac – Premier Advantage Package – $395 annual fee
  • ANZ – Breakfree Package – $375 annual fee

The above details were taken from each lender’s website on the 20th of August 2014, so changes may have occurred by the time you are reading this.

Below I am going to do an example of a loan without an Annual Fee VS a loan with an Annual Fee. I will assume they loan without the annual fee has an actual rate of 5.10% and the one with the annual fee has a rate of 5.00%.

You will find most lenders advertise the comparison rate over 25 years instead of 30 years and they use a loan amount of $150,000 when the average size loan would be closer to $250,000… The reason for this is to show the client the worse case scenario.

  • $150,000 @ 5.10% over 25 years with $0 annual fee – comparison rate = 5.10%
  • $150,000 @ 5.00% over 25 years with $395 annual fee – comparison rate = 5.37%
    • Therefore a loan with a higher interest rate and $0 Annual Fee is actually cheaper in the long run

The higher the loan amount, the comparison rate will drop because the included fees are diluted over a larger figure. For example:

  • $450,000 @ 5.10% over 25 years with $0 annual fee – comparison rate = 5.10%
  • $450,000 @ 5.00% over 25 years with $395 annual fee – comparison rate = 5.13%
    • The loan with the higher interest rate with $0 Annual Fee is still cheaper in the long run although the Comparison Rate on the other loan has dropped significantly
  • $700,000 @ 5.10% over 25 years with $0 annual fee – comparison rate = 5.10%
  • $700,000 @ 5.10% over 25 years with $395 annual fee – comparison rate = 5.08%
    • Finally the loan amount is large enough to effectively have a loan life interest rate that is lower than a loan product that does not have an annual fee

 

Comparison Rate – Summary

 

Personally I find the Comparison Rate confusing for most clients, the main thing to remember is that just because a loan has a cheap interest, doesn’t mean it has the lowest loan life rate. In certain circumstance, when the loan amount is high, then it may be appropriate to apply for a loan that comes with an Annual Fee.

The cut off point is about $550,000:

  • $550,000 @ 5.00% over 25 years with $395 annual fee – comparison rate = 5.10%

Therefore if your loan amount is less than $550,000 on the examples given above, I would always opt for a loan that had a slightly higher interest rate with $0 monthly & $0 annual Fee.

But even then, if your loan is $600,000 and you goal is to pay it off as quickly as possible, therefore your loan balance goes below $550,000 for more than half of the loan term, again you will then be better off with the higher interest rate and a product that has $0 monthly & $0 annual fee.

It is for this reason, as a general rule, I always try and find a great product for my clients with a low interest rate that has $0 monthly & $0 annual fees.

 

I hope this article has been useful for you to get a better understanding of what a Comparison Rate means, how it affects your actual interest rate and what you should look for in a Comparison Rate.

As you can imagine each specific interest rate, loan amount and associated fees with certain products will generate a different comparison rate. I can calculate your specific comparison rate, just get in touch and I can let you know.

Best wishes for now

 

Nathan Daniell
Managing Director
Simplify Your Mortgage Pty Ltd

 

P.S. Thank you for taking the time to read my article Comparison Rate, I plan to write more articles in the future, so watch this space.