Posted Under: Blog Posted On 21/07/2016
Low interest rates are being advertised everywhere at the moment, and it’s easy to be caught up in the hype and search for the lowest advertised rate. But beware, advertised rates are not as they seem. At first glance they appear a great deal, but we need to looker deeper…….The advertised rates are indeed the rates that are charged on the money borrowed, however, they do not include the other costs involved with the loan that you will need to pay.
Banks and other lenders are now legally required to display a comparison rate when advertising any loan. So what is a comparison rate? The comparison rate is a way to help identify the true cost of a loan. It includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. Other fees and charges include establishment fees, approval fees, any upfront or ongoing fees that comprise the overall cost of a loan.
For example, you may see a loan advertised with a fixed interest rate of 3.89%, and a comparison rate of 4.95%. All comparison rates are based on a loan of $150,000 over 25 years. While this comparison rate reflects the true cost if you do indeed take a $150,000 loan over 25 years, it would be a completely different figure for a loan size of let’s say $450,000, or for a typical current loan term of 30 years. So if your loan size is greater than $150,000 and is the usual 30-year term, the actual comparison rate for that loan will be somewhere between the advertised rate and the comparison rate.
Just as important at looking at the comparison rate, is looking at all the loan’s features and getting the loan that works for your situation.
- Home Loan or Investment Property Loan
- Fixed interest rates (for certainty for a specific period of time) or Variable interest rates?
- Principal and Interest (to pay off the loan over time) or Interest Only (to keep repayments down for a specific time)
- Offset account against the loan (a bank account where the balance offsets against your home loan thereby reducing interest payable on the loan.
- Line of Credit – Giving you access to your home equity for renovations or other purchases
- Construction Loan – when building a new home
- And more.
So although a low advertised rate is ‘sexy’ at first, take into consideration the comparative rate as well as the features of the loan advertised to make sure it is right for you.
A Counting House now offers home loans through our sister company The Loan House which gives us access to an extensive panel of lenders so that we can find the right loan for you. Call Mollie at the A Counting House office on 0755261855 for a free loan review to see how much we can save you.