Comparison Rate vs. Standard Variable Rate (SVR)
Comparison Rate vs. Standard Variable Rate (SVR): Do You Really Understand the Difference?
When searching for a home loan, understanding the different types of interest rates offered by lenders is crucial. While fixed and variable interest rates are commonly known, two rare but essential concepts are the Comparison Rate and the Standard Variable Rate (SVR). Many borrowers find these terms confusing, but knowing what they mean can help you choose the best mortgage option.
What Is a Comparison Rate?
A Comparison Rate reflects the true cost of a loan by incorporating both the interest rate and certain associated fees. Its primary purpose is to help borrowers accurately compare loan products offered by different financial institutions and mortgage providers.
Comparison rates are calculated using a formula regulated by the Consumer Credit Code, ensuring that all Australian financial institutions use the same calculation method. Typically, this rate is based on a $150,000 loan over a 25-year term.
However, it’s important to note that the comparison rate does not include:
- Government fees, such as stamp duty or mortgage registration fees.
- Fees associated with optional loan features, like early repayment or redraw facilities.
- Costs that haven’t been determined at the time of calculation.
- Savings from benefits such as waived fees or interest offset accounts.
Also, different loan terms, fees, and amounts may result in varying comparison rates. For instance, for interest-only variable loans, the comparison rate is based on a 5-year interest-only period, while for fixed interest-only loans, it is calculated based on the length of the fixed term. Since interest-only payments do not reduce the principal loan amount, borrowers may end up paying more interest over time.
Key takeaway: A comparison rate provides a benchmark for understanding a loan’s actual cost. However, because it is based on a standardized loan amount, it may not fully reflect your specific borrowing situation, especially if your loan is significantly higher than $150,000.
What Is the Standard Variable Rate (SVR)?
The Standard Variable Rate (SVR) is the base interest rate applied to a lender’s standard home loan. It serves as the benchmark rate for pricing other variable-rate mortgage products.
SVR loans typically offer features such as offset accounts and redraw facilities, but they often come with a higher interest rate than basic variable loan products.
Each lender sets its own SVR, and these rates fluctuate based on factors like:
- The Reserve Bank of Australia (RBA) cash rate changes.
- Market conditions and lender-specific policies.
For example, if the RBA increases the cash rate by 0.25%, major banks and lenders generally adjust their SVRs accordingly. However, changes in SVRs are not uniform across all lenders, meaning one bank may raise or lower its rate while others do not.
How Does the SVR Impact Your Final Interest Rate?
When choosing a home loan, lenders usually offer discounted rates based on the SVR. The final interest rate you receive depends on factors such as:
- Loan purpose (e.g., owner-occupied or investment property).
- Loan amount (higher amounts may qualify for bigger discounts).
- Property market value.
- Loan-to-Value Ratio (LVR).
- Credit score.
For example, some lenders offer a basic variable rate loan with fewer features, which may be lower than an SVR-based loan. However, in a rising interest rate environment, discounted SVR loans can sometimes provide better savings.
Choosing the Right Home Loan for You
To determine the best home loan for your needs, it’s essential to consider more than just the advertised rate. Features, fees, and potential rate changes can significantly impact your repayment costs over time.
If you need expert guidance tailored to your financial situation, contact our mortgage brokers today! We can help you find the most competitive loan options and secure the best rates for your home loan.
Visit our website for more details: openmortgage.au