What Is a Comparison Rate?
The advertised rate is the headline. The comparison rate is meant to show the true cost once fees are baked in. Here is how to read both, and where the comparison rate falls short.
5 min readAustralia-wide
Every home loan ad in Australia shows two numbers: the interest rate, and next to it a comparison rate. The comparison rate exists to stop lenders luring you with a low headline rate while hiding the real cost in fees. It is a genuinely useful tool, but it has limits, and knowing them stops you being caught out.
The comparison rate rolls the interest rate together with most standard fees into a single percentage, so you can compare loans more fairly than by headline rate alone. By law it is calculated on a standard example, commonly a $150,000 loan over 25 years, which is often very different from your actual loan, so use it as a guide, not gospel.
What it actually includes
The comparison rate combines the interest rate with most of the standard fees attached to a loan, such as application and ongoing account fees, and expresses the total as a single annual percentage. Because fees are included, the comparison rate is almost always higher than the advertised interest rate. A loan advertised at a low rate but loaded with fees will show a noticeably higher comparison rate, which is exactly the warning it is designed to give.
Why it exists
Before comparison rates were mandatory, lenders could advertise a very low rate and quietly recover the difference through fees. The comparison rate was introduced so borrowers could see past the headline and compare the real cost of one loan against another on a consistent basis. It shifts some power back to you, the borrower.
Where it falls short
Here is the catch most people miss. The comparison rate is calculated on a fixed, standard example set by regulation, typically a loan of around $150,000 over 25 years. Almost nobody borrows exactly that. If your loan is much larger or a different term, the comparison rate on the ad will not reflect your real cost.
The comparison rate also cannot capture fees that are not knowable in advance, such as redraw fees or break costs, and it does not value features like an offset account that could save you far more than a small rate difference. Two loans with similar comparison rates can suit very different borrowers.
How to use it well
Use the comparison rate as a quick sanity check that an advertised rate is not hiding heavy fees. Then look past it. Ask for the actual fees on the specific loan and your loan size, weigh up features you will genuinely use like an offset account, and compare the real total cost. The best loan for you is not always the one with the lowest comparison rate.
To see how a given rate translates into real repayments on your loan amount, use the repayment calculator.
Common questions
What is a comparison rate on a home loan?
It is a single percentage that combines the interest rate with most standard fees, so you can compare the true cost of loans more fairly than by the advertised rate alone. It is almost always higher than the headline interest rate because it includes fees.
Why is the comparison rate higher than the interest rate?
Because it includes fees that the advertised interest rate leaves out, such as application and ongoing account fees. The bigger the gap between the two numbers, the more the loan relies on fees.
Is the loan with the lowest comparison rate always best?
No. The comparison rate is based on a standard example loan, often around $150,000 over 25 years, which may not match your loan. It also ignores the value of features like offset accounts. Compare the real fees on your loan size and the features you will use.
What fees does the comparison rate not include?
It cannot include fees that are not knowable in advance, such as redraw fees, late fees or break costs on fixed loans. It also does not place a value on useful features like offset accounts or unlimited extra repayments.
Want the real cost, not the headline?
A licensed broker can compare loans on your actual numbers and features, not a standard example. Free to you.