When it comes to assessing home loan products, just which rate should home buyers consider and is a comparison rate a genuine comparison?
Choosing a home loan is no simple task, and just comparing interest rates, though it might sound simple enough, can prove to be a real challenge.
The real cost of a home loan lies not just in its interest rate, but also its associated fees and charges.
Furthermore, a home loan usually offers more than one interest rate, for example, a standard variable rate of 6.69 per cent as well as comparison rate of 6.74 per cent. Confused?
This comparison rate, introduced under the Uniform Consumer Credit Code in 2003, aims to help borrowers understand the true cost of their mortgage, including the interest rates as well as fees and charges.
However the helpfulness of comparison rates, not to mention accurateness, remains rather hazy.
According to a review of comparison rates conducted by Hawkless Consulting for the Uniform Consumer Credit Code Management Committee in 2008, the benefits of comparison rates remain theoretical at best, yet it has remained compulsory for all lenders to use them.
Michael Russell, CEO of brokerage Mortgage Choice, says he would welcome a review into the ongoing relevance of comparison rates.
“Our customers are not placing a huge amount of relevance in the comparison rate anymore," he says.
Furthermore, according to Mr Russell, comparison rates do not include all costs associated with a mortgage, particularly exit fees, and therefore they cannot be considered to be a true reflection of the cost of a mortgage.
James Boyle, CEO of non-bank lender Liberty Financial, is also sceptical of their relevance.
"They are expensive to maintain and in our experience borrowers neither refer to nor rely on them,” he says.
“In fact, with recent changes in regulation placing higher emphasis on the assessment and suitability of loans I’d be surprised if a review didn’t find comparison rates redundant," Mr Boyle said.
For property buyers shopping around for a home loan, the best policy to adopt in order to ensure you know the true cost of your loan would be to take the time to understand any product yourself. You can do this simply by requesting an outline of all associated fees – now compulsory under the new National Consumer Credit Protection laws (NCCP) before signing any home loan contracts.
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