What is the difference between a comparison rate and the headline rate?

Advertised home loan rates are designed to look attractive, and the lowest headline rate is not always the cheapest loan. That is exactly why the comparison rate exists. Here is the difference, and why the comparison rate is the number to focus on.

The headline rate

The headline rate, also called the advertised or nominal rate, is simply the interest rate charged on the loan. It is the big number lenders promote. On its own it tells you nothing about the fees that come with the loan, which is its limitation.

The comparison rate

The comparison rate combines the interest rate with most of the standard fees and charges into a single percentage. Lenders are required by law to display a comparison rate alongside advertised rates, precisely so borrowers can see past a low headline rate to the truer cost of the loan.

Why the comparison rate matters

A loan can advertise a very low headline rate but carry high ongoing or upfront fees. Those fees lift the comparison rate above the headline. So two loans with the same headline rate can have different comparison rates, and the one with the lower comparison rate is generally the better value, all else equal.

What the comparison rate includes and excludes

The comparison rate includes the interest rate and most standard fees such as application and ongoing fees. It does not include every possible cost, things like some government charges, and fees that may or may not apply such as redraw or early exit fees, are generally excluded. So it captures most, but not all, of the cost.

It is based on a standard example loan

The comparison rate is calculated on a standard example loan amount and term set by regulation, not your actual loan. That makes it a fair basis for comparing one loan against another, but it is a guide rather than the exact rate for your specific loan size and term.

How to use it

Use the comparison rate to compare loans on a like for like basis, rather than choosing on the headline rate alone. If a loan has a tempting headline rate but a much higher comparison rate, that gap is telling you the fees are significant.

Look beyond the rate too

Even the comparison rate does not capture everything that matters. Loan features such as an offset account, redraw, the ability to make extra repayments, and the fixed versus variable choice can be worth more to you than a small rate difference, depending on how you use the loan.

Getting genuine value

The real goal is the loan that costs you least and suits you best over its life, not the one with the flashiest headline. A broker can compare the true cost across many lenders, factoring in the comparison rate, fees and the features you will actually use, usually at no cost to you.