Comparison Rate or AAPR

What is a comparison rate or average annual percentage rate (AAPR)...

In 2003 the Australian Consumer Credit Code (ACCC) required that all lenders that published interest rates for a product also publish the comparison rate. This is an attempt to inform the consumer of the true cost of a loan.

The comparison rate is designed to  determine the average annual percentage rate or real interest rate of a loan after taking into account the length of the loan, upfront fees, ongoing annual or monthly fees and exit fees. It also takes into account loans with an introductory period or a fixed rate and later reverts into another rate.

Below are three examples

Loan A Loan Term Loan Amount Variable Interest Rate Upfront Fees Ongoing Fees Exit Fees      COMPARISON RATE

30 Years $300,000 6.50% $0 $0 $0 6.50%

Loan B Loan Term Loan Amount Variable Interest Rate Upfront Fees Ongoing Fees Exit Fees      COMPARISON RATE

30 Years $300,000 6.50% $600 $10 per month $300 6.58%

Loan C Loan Term Loan Amount Fixed Rate Variable Interest Rate Upfront Fees Ongoing Fees Exit Fees      COMPARISON RATE

30 Years $300,000 5.60% 6.50% $600 $10 per month $300 6.35%

 

Looking at the example above, Loan A comparison rate is the same as the advertised interest rate because there are no added fees to the loan. Loan B is the same interest rate as Loan A, however, the comparison rate is higher because the fees add to the annual cost of the loan. Therefore, the consumer is able to determine that Loan A is cheaper than loan B

Loan C initial fixed rate is 5.60% for the first three years and then reverts to a variable rate at 6.50%. The consumer is able to compare the real rate of this loan to Loans A and B and therefore make an informative decision based on cost.

 

Disadvantages of Comparison Rates

To summarise here are the main disadvantages of comparison rates and the very reason why you should contact a mortgage professional to help you select a loan;

- Comparison rates do not take into account other fees such as redraw fees, transaction fees, switching

costs, early exit fees and any other associated costs associated. Redraw fees can be upward of $100 per redraw or early exit fees can be thousands of dollars if a borrower decides to exit the loan early.

- They do not take into account other features attached to a loan such as extra- repayments, portability, offset

accounts and free redraw that can save you thousands of dollars in interest repayments by using these effectively. A loan my annually cost 0.05% more than another but the borrower may take advantage of an offset account to reduce the loan term and the interest paid.

 

There are more to loans than just interest rates. To find out more read the following article common mortgage mistakes.

Also, most of our mortgage calculators show comparison rate or real rate in each calculation specific to the loan amount and term.

 

---

 

Need Help?

We have home loan experts that can sort through hundreds of loan in less than 2 minutes to find the most suitable home loan for your lending needs. They can show you all the all the hidden costs and restrictions as well as show you which lenders are the most reputable to choose from.

 

Mortgage Help