Heritage Bank’s Take on Comparison Rates

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Below is a bit of information which the team here at Mortgage Advice thought was interesting. As comparison rates are often skewed to providing the best image for the lender and are not direct reflections of your individual needs.

Heritage has recently been asked the hard questions when it comes to our super-low 1 Year fixed rate of 3.99%pa (5.58%pa comparison rate*). We spoke to our Head of Intermediaries, David Ure, about how much importance to place on comparison rates.

As all mortgage brokers are aware, lenders today are required to show comparison rates in advertisements for their home loans as a way to try to establish the “true” cost of a loan.

The comparison rate combines both the interest rate, and the fees and charges relating to a loan over its lifetime, into a single annual percentage figure.

The aim is to provide customers with an all-encompassing figure, so that they can compare “apples with apples when looking at loans from different lenders.

However Heritage Bank’s Head of Intermediaries David Ure said comparison rates could be misleading and it paid for brokers and borrowers to dig a little deeper to uncover whether a loan was right for you.

“Comparison rates are based on a snapshot of a particular set of circumstances. It might be a $200,000 loan on a 25-year term being paid off in monthly repayments, starting with a fixed-rate period and then reverting to a standard variable rate,” Mr Ure said.

“The reality is that a different set of circumstances might produce a very different result.

“A loan of a different amount, over a different timeframe, and repaid in weekly instalments would not produce the same percentage rate.”

Mr Ure said fewer and fewer loans these days actually lasted their full term, with many paid off in under a decade.

He said this also meant that comparison rates based on a 25 or 30 year term might not take into account what happened when people repaid the loan early or switched to different loan types along the way.

“The comparison rate also does not reflect the fact that people taking a fixed-rate loan may re-fix at the end of their term, or might switch to a different type of variable loan product other than the one assumed in the comparison rate,” he said

“At some institutions, people will be able to re-fix and switch without cost, or payout their loan early with no penalty; at other lenders, they will incur a fee.

“There is a danger that people may use comparison rates to oversimplify their choice simply on the interest rate, rather than taking into account other features of the loan that might be important to them.

“The bottom line is that a comparison rate does provide a guide but borrowers need to sit down and do their homework based on their own individual circumstances.”

For a personalised comparison rate please contact Mortgage Advice and we will be happy to work this out for you.

Have a great Friday.

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