What is a comparison rate?

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What is a comparison rate?

The government created a “standard” to help consumers compare between loan products. As we all know, just looking at the headline rate isn’t enough because all lenders have different set up costs, discharge costs, monthly costs and annual costs etc. The government wanted to include all these costs in the interest rate provided and hence created the comparison rate.
The comparison rate assumes a 25 years, P&I $150,000 loan. This is why you will see loan advertisements with the disclaimer “Comparison rate calculated on a loan of $150,000 for a term of 25 years, with monthly repayments”.

Personally, I see what the government was trying to do, but their biggest problem was choosing a $150,000 loan amount as the benchmark. Considering the average loan in Australia is circa $350,000, they should have used that as the benchmark because a lower loan amount skews the figures and probably confuses people more than it should.
At Orange Finance, when we show product comparisons, we detail all set up costs, ongoing costs and discharge costs for the loan we recommend and then we add all these costs up at the end so you have the exact figures to compare one loan versus the next.

Here is an example of the level of detail of the comparison we show. We have made up the names of the lenders so people don’t think the interest rates being shown are valid in the future. We also tally up the total cost over some period of time, usually between 3 and 5 years depending on circumstance.

Home Loan Comparison