Many Australians do not understand the basic features of a home loan

MANY confused consumers could end up paying extra on their home loan because they do not understand basic mortgage terminology.

MANY confused consumers could end up paying thousands of dollars extra on their home loan because they do not understand basic mortgage terminology.

Concerning new McCrindle research, commissioned by lender Gateway Credit Union, quizzed 1000 Australians and revealed about 1 in 2 people do not know how an interest rate and comparison rate differ.

The interest rate is the actual interest rate you get charged, however, the comparison rate factors in fees and takes into account every foreseeable cost.

An interest rate is the actual rate on the loan whereas a comparison rate is known as the “real rate” and includes the average rate including any ongoing or upfront fees over the loan term.

Borrowers should be checking the comparison rate before signing up to a home loan.

But financial comparison RateCity analysis found for customers on a $300,000 30-year loan paying the average advertised rate of the big four banks at 4.49 per cent versus the average comparison rate 4.88 per cent, they could pay more than $12,000 extra over the life of the loan if they go by the comparison rate.

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Gateway Credit Union’s chief executive officer Paul Thomas said the most critical thing any borrower should know is whether they can afford their loan repayments.

Gateway Credit Union’s chief executive officer Paul Thomas said being able to service a loan is the most important thing to know before taking out a mortgage.

“Before you even start looking for a house understand know your loan serviceability and what can you reasonably service as a borrower and have some reasonable life,’’ he said.

“The rate is important but the most important thing is the comparison rate.

“Once you have a loan do you best to amortise that loan as quickly as you can — if you can make advanced payments, if you can have an offset account, make lump sum payments the quicker you do that the less interest you will pay.”

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And a majority (55 per cent) do not know understand the meaning of a split home loan — which is dividing a portion of a loan on a variable rate and another portion on a fixed rate.

Many Australians do not know the definition of a “split” home loan.

RateCity spokeswoman Sally Tindall said the comparison rate was one of the most critical aspects of a loan.

“The comparison rate will help you find all the hidden fees and charges in a loan, if this rate is significantly higher than the advertised rate then they are hiding something and it’s up to read the fine print or ask for help from a mortgage broker,’’ she said.

“When you are searching for a home loan search on the comparison rate so you don’t get lured by some marketing promotion such as honeymoon rates.”

Ms Tindall said the rate, loan term, fees and features of the loan and a split, variable or fixed loan are good to know.

Many owner occupier principal and interest loans are now below four per cent and experts believe the cash rate could stay on hold all of 2018.

Originally published as Many Australians do not understand the basic features of a home loan