iChoice Hates Comparison Rates

Mike's fixed interest period is unfortunately coming to an end, so we sought the best variable rates available. We just lodged his application to refinance his $1.2M home loan away from the Commonwealth Bank to another major bank?who can offer a better variable rate of 5.19%.?

Rates have increased by 3.5% over the last 12 months, so back in the good old days, this rate would have been 1.69%.?But?1.69% wasn't available back then, reflecting that with all that's going on, bank?margins?have in fact been squeezed - a lot!

We're also establishing a?Loan B?(with its own offset) for Mike to also unlock some equity. We're waiving the first year's annual fee and he'll collect an?untaxable Cash Refinance Rebate of $4,000. He'll now earn?50% more Qantas Points?with his new credit card (0.75 Qantas Points per $1) and from now on will hang out in the Qantas Lounge on his annual overseas trips.?Awesome, right?

But then Mike asked that dreaded question,?but what's the Comparison Rate??~?oh boy?~

We'd like you all to completely ignore Comparison Rates and we’re going to explain why.?They were introduced in 2003 with good intentions,?creating a % that's calculated by adding together the actual interest rate, plus any fees and charges that may apply to the loan. The total figure is then converted into a percentage rate in a rudimentary effort to highlight the true cost of the loan.

The issue is, nobody really knows what all the assumptions are. And the formula isn't the easiest to understand for most:

?One bold assumption is that it's based on a?$150,000 loan with a 25-year term.?Umm ~

Most people would see, for example, that a $395 annual fee is not?that?significant on a $1.2M home loan, but for a notional $150,000 loan, would alone knock up the 'Comparison Rate' by 0.26%!

The $395 on a $1.2M loan, if tied in with the rate, in fact represents only 3 basis points!?And on top, the CR doesn't take into account the following benefits Mike will receive:

*?Credit Card annual fee waiver, which is normally $250?

*?An offset account, and he can even run dual offset accounts, the benefits of which aren't captured by the CR

*?$4,000 rebate, which isn't reflected in the CR!

*?A stack of Qantas Points, free travel insurance and airport lounge access

Comparison Rates need to go, leaving us mortgage professionals to calculate the benefits of certain lending structures, the good old-fashioned way, taking your position and personal preferences into account. Perhaps CR's played some kind of role when most loans had honeymoon rates and when the banks were allowed to charge 'Early Repayment fees', but this was made illegal some years ago.