A comparison rate is the true cost of a loan every year, which including fees and charges, and is generally considered a more realistic comparative figure than the published interest rate assign to a mortgage product. While an interest rate may be advertised as low to lure you into that product, the comparison rate generally provides a more realistic understanding of the cost of a loan, and allows you to more easily compare one loan against another. It is required by law that the comparison rate always accompany an interest rate and it is incumbent upon mortgage brokers to include this data in a manner, format, and presentation that is no different to the published Annual Percentage Rate (APR).
This article introduces a graph that might be used on pages introducing the comparison rate to illustrate its potential importance when comparing loan products (we all know the comparison rate doesn't consider anything other than low and fixed unrealistic criteria). The graph will be made available in our complimentary RBA website plugin.
Part 10 of the National Consumer Credit Protection Act 2009 includes the relevant legislation governing the inclusion of the comparison rate in all consumer-facing material. The nature of the comparison rate, and its required inclusion in all your consumer-facing advertising and marketing material is discussed in an article titled "Mortgage Broker Advertising Compliance" (the article introduces a number of compliance considerations that applies when advertising).
A Graphical Illustration of Interest and Comparison Rates
The graph below shows a number of products from a range of banks (they won't be bank that you necessarily have on your panel). The purpose of the graph is simply to illustrate how the lowest published rates don't necessarily equate to the lower or more appropriate comparison rate. To be fair we've sourced all the products with the lowest and current interest rates made available to the market.
You'll note that the published rates might appear fairly consistent and 'flat' as this is a figure the banks might often use to appeal to customers and compete against each other, but it doesn't necessarily represent the true rate provided by the product (as illustrated by the accompanying comparison rate line in orange).
At the time of writing Citibank have a 1.89% product with a comparison rate nearing 5%. While the product may be suitable for many (we have no idea), it does illustrate the gap between the rate claim and reality (bank codes are returned by hovering over the graph).
Average Borrowing Rates
The Australian Prudential Regulation Authority (APRA) reports aggregated or 'average' rate data to the RBA every quarter, and the data is a reasonable indication of what rate the average borrower is paying. The graph below shows rates for Owner Occupied Principal and Interest (OO PI), Existing Owner Occupied PI (Existing OO PI), and Investment Principal and Interest (Investment PI), with the rates measured against the current cash rate.
It's worth noting that the average existing lending rates are higher than the current available rate suggesting there's a clear advantage in regularly refinancing or haggling your bank for a better rate.
The data also shows us that many are not borrowing at the lowest rates that are actually published... and this is the point. It's always nice to illustrate a market comparison in a visual manner so a borrower is able to set realistic expectations.
This quick article was necessary to support an article that introduces our very high-performing and very affordably-priced mortgage broker website. Designed to convert organic traffic as well as support paid promotion, the site is extremely comprehensive and requires supporting articles such as this one to explain various concepts.