The boss of one of Australia’s largest home loan comparison websites says that comparison rates are now obsolete and "decades behind" today's market conditions.
RateCity CEO Paul Marshall said that while the comparison rate is a good concept, it is no longer helping mortgage borrowers as much as it once did.
“The comparison rate is a good industry benchmark for everyone that understands it,” Mr Marshall said. “However, its major flaw is that it doesn’t consider a customer’s specific lending requirements.”
“A lot of people don’t realise that every comparison rate you see is based on a $150,000 home loan. The reality is, $150,000 is decades behind today’s average mortgage size of $380,000, and what this does is distort the cost of fees and charges in a loan.”
In an effort to address the what he calls a “major flaw”, Mr Marshall explained that RateCity has created a new system called Real Time Ratings. The system analyses almost 4,000 offers from more than 100 lenders and gives them a score out of five, based on interest rate, fees and flexibility (such as whether they include an offset account or allow extra repayments).
The system also factors in a customer’s loan size, deposit amount and borrowing type, giving them personalised results.
“We could have easily increased the loan size to bring it in line with the national average, but it just seemed like a particularly unconstructive thing to do,” Mr Marshall said.
“Million-dollar homes might be common in Sydney and Melbourne, but the rest of the country are taking out mortgages less than half that size, so there really isn’t a one-size-fits-all model.
“From this point, we took the idea of tailoring the ratings to a person’s needs and applied it across the board — from whether they’re an investor to how flexible they want the loan to be. The market is far too complicated these days for basic averages and assumptions.”
Mr Marshall said that RateCity’s new system operates in real time, “a first in an industry that has until now used an inherently flawed system of ratings and awards that were only ranked at a point in time in the past, sometimes up to 12 months prior.”
While Real Time Ratings is currently only available on the RateCity website, Mr Marshall is keen to see it become industry-standard in the years ahead.
“At the end of the day, we developed this system so everyday Australians would be able to compare complex loans in a way that’s both easy to understand and accurate,” the CEO said.
“We believe the system is also a great tool for lenders and mortgage brokers. It helps take the hard work out of finding the best loans to suit their customers’ needs. For example, some people require a loan with more flexibility, while others are just driven by rate alone.”
RateCity receives updates live from lenders on the day rates are changed. The comparison website also uses website monitoring technology as a backup so nothing is missed. As soon as new information is updated in the group’s database, Real Time Ratings is re-indexed to reflect the new state of play.
According to Mr Marshall, traditional ratings systems were designed in a different era of computing power.
“They are static, with ratings calculated offline and at a point in time. These ratings are then set in stone for six months to a year,” he said.
“With the benefit of far more powerful computing technology at our fingertips these days, Real Time Ratings updates instantly as the borrower interacts with the website and as product data is updated on the platform.”