Loans have fees – fees to get in, fees to get out, monthly fees, annual fees, legal fees – depending on what product you choose. They also have different rates – fixed rates, introductory rates, revert rates etc etc etc.

All of that can be mighty confusing to the man or woman in the street and knowing what the true cost of a loan is – well it really is something you need to know about.

Comparison rates are supposed to add all the fees in and the various interest rates that will theoretically apply at different stages of the loan and then come up with a figure that is supposed to represent the true cost over the term of the loan based on today’s rates.

That’s what they are supposed to do.

A comparison rate is calculated by taking account of the following things:

• the amount of the loan;

• the term of the loan;

• the repayment frequency;

• the interest rate; and

• the fees and charges connected with the loan

However, some bright spark at some government department thought that squeezing everything into a “standard loan” would be a good benchmark for people – what a steaming pile of horse excrement!!!

So, when you see a bank advertising their comparison rate alongside the headline rate (which they are required to do by law), it is usually a standardised loan of $150,000 over 25 years.

Most lenders have pricing discount tiers, so that if your loan is over a certain amount, you’ll get a slightly lower rate (e.g. >$250k, > $500k, > $1million). So, in this case, if you have a loan that is NOT the “standard loan” then the comparison rate is total nonsense, because the standard loan isn’t eligible for any of those discounts.

The average new loan is over $400k, and if you’re in Sydney, mortgages double that or more are fairly common.

So, if you are looking at comparison rates – you are dead set wasting your time.

And here’s another thing – the comparison rates assumes that you will stay in the loan for the full term. People rarely do.

The reality is that most people undergo a major change in their lives that necessitates changing their borrowing arrangements every few years or so – and those changes mean that the goalposts keep moving.

But in reality, if you see a cracking 3 year intro rate and you jump on it – in 3 years time, you should be looking to see what the next best thing is you should do with your mortgage then (or, if you have a decent broker, they will do this for you and advise you accordingly).

When your loan reverts to the standard rate, that is when your bank starts screwing you over. Why should you have to put up with that?

Very rarely will you be well served by sticking with one bank for the term of your natural life.

I’m open with our clients – I might recommend a great 3 year fixed rate (or an intro rate), but I’ll tell them that in 3 years we will be seeing what the market is doing, and we might well refinance if we can pick up a better deal somewhere else.

I guess my point is that you shouldn’t rely on a comparison rate – you should continue to shop around every few years to make sure you’re still getting the best deal you can. It stops your broker and bank/s from being lazy and it will save you a motza!!!