Understanding the Difference Between Headline Rate vs Comparison Rate in Australian Mortgages

What is a Headline Rate?

In the Australian mortgage market, the headline rate, often referred to as the advertised rate, is the interest rate heavily promoted by lenders. This rate is typically highlighted in advertisements and marketing materials to attract potential borrowers. It's important to note that the headline rate is the base interest rate applied to the loan amount, excluding any additional fees or charges.

The Appeal of Headline Rates

Headline rates can be enticing as they often appear lower than other rates, giving borrowers the impression of lower monthly repayments. However, it's essential to remember that the headline rate doesn't account for the total cost of the loan. Borrowers should be aware that these rates might come with conditions or limited-time offers.

Understanding the Comparison Rate

The comparison rate, on the other hand, provides a more comprehensive overview of a loan's cost. Introduced by the National Consumer Credit Protection Act, the comparison rate includes the headline rate plus most fees and charges associated with the loan. This rate aims to give borrowers a clearer picture of what they will pay over the life of the loan, making it a more reliable measure for comparing different mortgage offers.

How is the Comparison Rate Calculated?

The comparison rate is calculated based on a set of standard assumptions, such as a $150,000 loan amount over a 25-year term. While this standardisation helps in comparing loans, it's worth noting that your specific circumstances may alter the actual comparison rate.

Practical Tips for Evaluating Rates

• Look Beyond the Headline: Always consider the comparison rate when evaluating loan offers. It accounts for both the interest rate and most fees, providing a more accurate cost assessment.

• Understand the Fees: Not all fees are included in the comparison rate, such as government charges and early repayment fees. Be sure to ask lenders for a breakdown of all possible costs.

• Consider Your Loan Term and Amount: Since the comparison rate is based on a standard loan amount and term, your specific loan details might affect the overall cost. Use online calculators to simulate different scenarios.

Common Mistakes to Avoid

• Ignoring the Comparison Rate: Some borrowers focus solely on the headline rate, leading to unexpected costs down the road. Always compare both rates before making a decision.

• Overlooking Terms and Conditions: Special conditions often accompany attractive headline rates. Ensure you understand these terms to avoid surprises.

• Neglecting Additional Costs: Some fees aren't included in the comparison rate. Always inquire about other potential costs like offset account fees or redraw fees.

How Esteb and Co Can Help

At Esteb and Co, we pride ourselves on helping clients navigate the complexities of the mortgage market. Our experienced brokers provide personalised advice, ensuring you understand both headline and comparison rates. We work with a broad network of lenders, offering you a range of options tailored to your financial situation and goals. Let us assist you in finding a mortgage that truly meets your needs.