What Is a Comparison Rate Mortgage?

Are you looking for a loan to buy a new home or a car? If so, I am sure you’ll want to know how your loan costs are calculated, and what is a comparison rate mortgage. Here, everything is explained in detail. 

The comparison rate represents the true cost of a home loan and includes the interest rate and all additional costs and fees related to a home loan. Comparison rates help borrowers to compare different loan conditions provided by financial institutions and mortgage providers.

Why Is It Important to Know How Much Is the Comparison Rate? 

Before the regulation that defined that the lenders are obliged to highlight the service fee, the lenders could offer very low interest rates but charge expensive upfront and ongoing fees. 

For instance, let’s imagine the lender had advertised a low mortgage interest rate of 2.5%, and you accepted it. However, once the loan is approved and you start receiving the bank statements, you could notice additional charges like $20 per month in account keeping fees or an annual $400 loan package fee. Once these expenses are added in, and you calculate the total cost sum,  the loan could be more expensive than a different lender offering 2.6% in mortgage interest rate, but with no fees.

The Possibility to Compare Loan Rates Is Your Legal Right 

Since those high fees could make the expenses even higher, while leaving the borrowers without a clear picture of how much their loan really costs, the mandatory comparison rate was introduced in 2003.

By this law, lenders are obliged to present the borrowers both with interest and additional fees that affect the cost of the loan. This way, the lenders could easily compare the costs between different financial institutions and decide what conditions suit them best. 

How Is Comparison Rate for a Mortgage Calculated? 

The formula for calculating the comparison rate is quite complex and provided by Uniform Consumer Credit Code. It implies summing the interest rate with all additional costs. The comparison rate is usually calculated for loans that are worth at least $150,000 for a payment period of 25 years and more

Calculating the comparison rate, the lender usually considers the following factors: 

  • The total amount of the loan,
  • Loan payment period,
  • Payment frequency,
  • Interest rate,
  • Additional fees like mortgage documentation fee, establishment fee, valuation fee, etc). 

Here is how the formula is applied in practical examples

Good to know: Keep in mind that the numbers shown below are critically different in reality. Today, the usual loan sum equals $500,000 and is borrowed for 30 years. The following example is here to represent how the total sum to be paid is calculated, and 

Loan Amount$150,000
Payment Period25 years
Intro Interest Rate4.5%
Standard or Revert Rate5.5%
Upfront Fees$600
End Fees$500
Ongoing Fees (on a monthly basis)$10
Comparison Rate5.562%
Intro Monthly Repayment$833.75
Revert Monthly Repayment$918.33
Total Interest Payable$124,484
Total Fees Payable $4,100 
Total Payments $278,584 

What Fees Are Included in Comparison Rate Calculation? 

Usually, lenders include three types of fees in the comparison rate calculation. Here is what each fee includes.

Upfront Fees

Upfront fees are usually paid during the process of loan approval, and before the money is set into account. They imply: 

  • Application fee,
  • Pre-approval fee,
  • Documentation preparation fee,
  • Valuation fee,
  • Legal fee,
  • Settlement fee.

Ongoing Fees

Ongoing fees are usually payable all the time while the loan is actual. Those are calculated on a monthly, annually, or periodic basis and defined the same way:

  • Periodical admin fee,
  • Annual package fee,
  • Monthly account fee.

Discharge Fees 

Discharge fees are paid after the loan is finished, and they entail:

  • Documentation preparation fee,
  • Discharge admin fee,
  • Settlement fee.

What Fees Are not Covered by Comparison Rate? 

Although a number of fees are included in the initial comparison rate, you should know that there are also additional costs related to loan approval to be paid. Here are the fees to expect aside from those you pay to the lenders: 

  • Government charges like mortgage registration fees or stamp duty,
  • Early repayment or redraw charges in case something doesn’t go by initial plan, 
  • Fees and charges which are not available when the comparison rate is obtained,
  • Cost savings like waivers or the availability of interest offset arrangements that can influence the loan’s cost.

How to Calculate the Comparison Rate for the Home Loan, and Is It a Fixed Cost? 

Comparison cost is not a fixed expense since many fees differ from state to state. Moreover, the comparison rate could vary depending on the interest type of mortgage you choose – with variable interest rates which are always slightly higher than the fixed one, the comparison rate will be lower, and vice versa. Although there are many online calculators that could help you calculate the comparison rate, this is still not something you can lean on to. 

The best solution in this way is to consult the broker you’re collaborating with and ask for an official offer. Don’t forget there are many different factors that impact the final loan cost and that everything depends on the sum you need to borrow and the period of time needed to pay off the credit.