Canstar calls for a review of comparison rates

Consumer finance researcher Canstar has called for a review of home loan comparison rates, saying changes in the mortgage market since their introduction have robbed them of their usefulness.

Since 2009 lenders have been required to include a comparison rate when advertising interest rates. The comparison rate adds fees and charges to the overall cost of the loan and is calculated using a formula that assumes a A$150,000 loan amount and a 25 year term.

Comparison rates were controversial when they were introduced but, according to Canstar, they have only become more so since.

In a commentary in its latest home loan star ratings report, it said: "The pace of change in the home loan environment over the past five years has largely outstripped the usefulness of comparison rates.

"Infinite variations on loan amounts and terms these days make comparison rates inaccurate when putting one loan against another.

"The average loan is now $350,000, whereas the comparison rate on home loans is calculated on a $150,000 loan amount.

"The majority of borrowers refinance in five or six years, as opposed to staying the full term of 25 years."

Some loans are fixed for a period and then revert to another loan structure, making it uncertain what is being compared.

Government charges, such as stamp duty and mortgage registration fees, are not included in the calculation.

Fee waivers and offset arrangements may not be included.