The government ‘Comparison Rates’ trap

The government originally mandated ‘Comparison Rates’ as a way to make it easier for consumers to compare the true cost of a loan. But here’s the trick you may not have realized.

Key Point: The Comparison Rate actually smooths out the appearance of any large fees charged in the first 5 years, presenting them over a 25-year period. The large fees are still there, they just don’t look so astronomical when looked at over the life of the loan.

Keep in mind that the average home loan only runs 4-6 years before changing to another product or moving to another lender. In fact, the first 5 years tend to be where the real cost accrue, as the home owner buys, sells, upgrades, downgrades, redraws for a holiday, renovates, consolidates debt, or refinances for a better deal.

Because of this, many lenders will stack their fees at the front end of the loan, knowing full well that they will be hidden by the 25-year Comparison Rate. This makes their high cost (i.e. highly profitable) loans look ‘cheap’. Because of this, the government no longer legally requires Comparison Rates to be displayed.