Step 5 – calculate total costs as a percentage of the loan value.
Once you have a shortlist of lenders whose lending criteria you meet and whom appear to be very competitive, divide all their costs (interest and fees) into 5 years and come up with a percentage. The lender with the lowest percentage gets your business.
Case Study: comparing loans
Let’s compare “Loan A” and “Loan B”(in practice, there would be dozens loan products included from the lender panel in this comparison, but this is just for illustration purposes).
| Loan A | Loan B | |
| Loan amount | $350,000 | $350,000 |
| Interest rate | 6.00% | 5.95% |
| Application fee | $395 | $0 |
| Annual fee | $0 | $395 |
| Settlement fee | $0 | $220 |
| Valuation fee | $0 | $250 |
| Legal fee | $0 | $150 |
| Lenders mortgage insurance | $7,500 | $9,500 |
| Loan discharge fee | $350 | $350 |
| Total cost over 5 years | $113,245 | $114,990 |
| Avg. annual rate over 5 years (true cost) | 6.47% pa | 6.57% pa |
In this example, the loan with the higher interest rate (Loan A) actually works out to be effectively 0.10% per annum cheaper every year for 5 years.