Get a grip on interest rates
Home buyers confused, data shows
MANY confused consumers could end up paying thousands of dollars extra on their home loan because they do not understand basic mortgage terminology.
Concerning new McCrindle research, commissioned by lender Gateway Credit Union, quizzed 1000 Australians and revealed about one in two people do not know how an interest rate and comparison rate differ.
The interest rate is the actual interest rate you are charged, while the comparison rate factors in fees and takes into account every foreseeable cost.
An interest rate is the actual rate on the loan, whereas a comparison rate is known as the “real rate” and includes the average rate — including any ongoing or upfront fees over the loan term.
But financial comparison RateCity analysis found customers on a $300,000 30-year loan paying the average advertised rate of the big four banks of 4.49 per cent versus the average comparison rate 4.88 per cent, could pay more than $12,000 extra over the life of the loan if they went by the comparison rate.
Gateway Credit Union’s chief executive officer Paul Thomas said the most critical thing any borrower should know was whether they could afford their loan repayments.
“Before you even start looking for a house, understand your loan serviceability and what can you reasonably service as a borrower and have some reasonable life,’’ Mr Thomas said.
“The rate is important, but the most important thing is the comparison rate.”
And a majority (55 per cent) do not know understand the meaning of a split home loan — which is dividing a portion of a loan on a variable rate and another portion on a fixed rate.
RateCity spokeswoman Sally Tindall said the comparison rate was one of the most critical aspects of a loan.
“The comparison rate will help you find all the hidden fees and charges in a loan.,” she said.
“If this rate is significantly higher than the advertised rate then they are hiding something and it’s up to you to read the fine print or ask for help from a mortgage broker.
“When you are searching for a home loan, search on the comparison rate so you don’t get lured by some marketing promotion such as honeymoon rates.”