Uncovering costs a key benefit
Comparison rates are a high-level indication of the true cost of a home loan, says a bank and a broker.
Going a step further than the headline interest rate, comparison rates incorporate costs a borrower would encounter if they took out a home loan with a lender.
Brokers can use comparison rates to weigh up different home loan products available in the market, to recommend the best options for their clients.
Following the June official cash rate hike – the second successive hike this year – variable interest rates are on the rise, putting interest rates under the microscope.
Read more: Non-major banks bump up interest rates
Talking to MPA about the purpose of comparison rates, Great Southern Bank head of broker and insurance partnerships Mathew Patterson (pictured above left) said they can be a good lead-in to help customers understand the total commitment of a home loan.
“There’s a legal duty to provide comparison rates, and the intent behind it – to make things clearer for clients – should be applauded,” Patterson said.
The comparison rate is listed alongside a lender’s standard rate (the interest rate charged on the balance of the loan). Comparison rates include the interest rate and certain fees and charges including any annual fees, valuation and legal fees, establishment fees and discharge fees, he said.
“It won’t include any governments fees and charges like stamp duty or the impact of say, the First Home Loan Deposit Scheme on a loan,” Patterson said.
While comparison rates are useful as a lead-in to client discussions, they are based on a 25-year loan of $150,000, which Patterson said didn’t necessarily reflect actual client scenarios, where loans are taken for higher amounts, often over 30 years.
“For lenders, the comparison rate is a useful tool for getting a snapshot of the competitive landscape that our potential customers are seeing. But of course, we also tend to look at scenarios more commonly found among our customers, where they are borrowing more than $500,000,” Patterson said.
A broker adds value by providing a thorough lending comparison and credit proposal which includes duties, fees and loans, he said.
Patterson pointed out that Great Southern Bank didn’t charge annual fees, which was one of the factors that could influence comparison rates.
With a purpose to help all Australians own a home, in addition to helping customers with rates, Patterson said they were supported in several ways. Certain loans allowed additional repayments, flexibility to increase frequency of repayments, use of an offset account and/or the ability to repay lump sums.
“We also don’t charge a premium to customers for providing an FHLDS loan, as even if a customer might only have a 2% to 5% deposit, we can provide sub 80% loan rate on FHLDS,” Patterson said.
“For customers just starting their home loan journey but wary of rate increases we also offer fixed rate lock, which enables fixed rate customers to lock in their interest rate during the home loan application process.”
While a comparison rate was a “good introduction” to the financial aspects of a loan, Patterson said a broker’s credit proposal set out the criteria for making a home loan decision.
“The brokers’ credit proposal is ultimately going to be more useful … it looks at the needs of the client: servicing, fees, financial assistance from government support schemes and also takes into account their personal choices, for example do they want an ESG loan and would they pay a premium for that,” Patterson said.
Read more: Great Southern Bank doubles lending to first home buyers
Clarifying that comparison rates apply across both fixed and variable rate loans, Greater Geelong Finance director and mortgage and finance adviser Julie Joseph (pictured above, right) said as fixed rate loans roll over to a standard variable interest rate when they expire, this can push up the comparison rate.
A variable rate home loan with a low headline interest rate but high fees and charges may have a higher comparison rate than one with a higher rate and lower fees and charges, she said.
Emphasising the importance of looking at the detail driving the comparison rate, Joseph said while the cost of a loan is important, it shouldn’t be viewed in isolation.
“I always clarify my client’s priorities when seeking finance and outline why I recommend a product and why I believe it’s in the best interest for my client and their home loan needs,” Joseph said.
“It’s important to note the lowest interest rate is not always the lowest comparative rate and by reviewing both, a broker is able to get an accurate picture of the lowest cost option for the client.”
With interest rates on the rise, as borrowers roll off lower fixed interest rates, Joseph said her best tip for brokers wanting to get the best rate for their clients was to build relationships with lenders and leverage competitors’ interest rates.
“Understand the client appetite of your lender partners and how you can maximise their systems and processes to get the best result for your client,” Joseph said.
In addition to negotiating the best rate, Joseph suggests brokers could also check whether establishment and application fees can be waived.
“For clients on fixed interest rate loans, another tip is to be aware of their fixed interest rate expiry date. A month before the rate rolls over to the new variable interest rate, initiate a pricing request to improve your client’s interest rate. Alternatively, check if your client wants to extend their fixed interest rate period,” Joseph said.
“As we know, when the fixed interest rate rolls over to the new variable interest rate, it will be the standard variable rate which as we know, is generally much higher than we can achieve for our client.”
