A comparison rate is a single percentage that combines the interest rate with most loan fees, giving you a more accurate picture of a loan's true cost. It's required by law to be displayed alongside any advertised home loan or personal loan rate in Australia. Understanding how to read it and, crucially, what it doesn't include is one of the simplest ways to avoid overpaying for your mortgage.
Why Comparison Rates Exist
Banks can make a loan appear cheap by advertising a low headline rate while burying costs in fees. Before comparison rates were mandated, it was common to see:
- "$0 upfront fee!" (but $15/month ongoing fee)
- "4.99% p.a. rate!" (but $600 annual package fee)
- "Low rate!" (but $400 discharge fee hidden in the PDS)
The comparison rate solves this by rolling fees into a single number. If two loans both advertise 5.90% p.a., but one has a comparison rate of 5.95% p.a. and the other 6.20% p.a., the second loan carries significantly more fees.
What's Included vs Excluded
Included in the Comparison Rate
- The interest rate itself
- Application or establishment fees
- Ongoing monthly or annual fees
- Discharge/settlement fees
NOT Included
- Government charges (stamp duty, mortgage registration)
- Redraw fees
- Early repayment or break fees
- Lender's Mortgage Insurance (LMI)
- Fee waivers or discounts that are discretionary
- Offset account benefits
This matters because some of the most valuable (and costly) features aren't captured. A loan with a $10/month offset account fee won't show this in the comparison rate if the offset is classified as a separate product.
How the Comparison Rate Is Calculated
By law, the comparison rate must be calculated on a standardised loan:
- Amount: $150,000
- Term: 25 years
- Repayment type: Principal and interest
This creates an apples-to-apples benchmark. But it also creates a limitation: fees are proportionally more significant on a $150,000 loan than on a $600,000 loan.
The Size Effect
A $395 annual package fee on different loan sizes:
| Loan Amount | Fee as % of Loan | Impact on Comparison Rate |
|---|---|---|
| $150,000 | 0.26% | ~0.26% uplift |
| $400,000 | 0.10% | ~0.10% uplift |
| $600,000 | 0.07% | ~0.07% uplift |
| $1,000,000 | 0.04% | ~0.04% uplift |
For large loans, the comparison rate overstates the impact of fixed fees. A loan with a $395 annual fee and a headline rate of 5.90% p.a. might show a comparison rate of 6.16% p.a., but on your actual $600,000 loan, the effective rate is closer to 5.97% p.a.
How to Use Comparison Rates Effectively
Step 1: Use It as a First Filter
Sort loans by comparison rate to quickly eliminate expensive options. If a loan's comparison rate is more than 0.30% above its headline rate, it's fee-heavy.
Step 2: Check the Gap
| Gap Between Advertised & Comparison | Interpretation |
|---|---|
| 0.00-0.05% | Very low fees (often no-frills loans) |
| 0.05-0.15% | Moderate fees (typical of most loans) |
| 0.15-0.30% | Significant fees (check annual/monthly charges) |
| 0.30%+ | High fees (usually package loans) |
Step 3: Adjust for Your Loan Size
If your loan is larger than $150,000 (and it almost certainly is), the true impact of fixed fees is smaller than the comparison rate suggests. For large loans, the headline rate becomes more important.
Step 4: Factor In What's Missing
The comparison rate doesn't capture the value of an offset account, fee waivers, or cashback offers. A loan with a higher comparison rate but an offset account can be cheaper in practice if you maintain a significant offset balance.
The Comparison Rate Warning
Every comparison rate must be accompanied by a warning along the lines of:
"WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate."
This isn't just legal boilerplate. It's genuinely important. The comparison rate on a $150,000 / 25-year loan may not reflect your actual cost on a $500,000 / 30-year loan with an offset account.
Making Comparison Rates Work for You
The comparison rate is your best tool for quickly comparing the true cost of loans, but it's not perfect. Use it as a starting point, understand what it includes and excludes, adjust for your actual loan size, and factor in features like offset accounts that aren't captured. When in doubt, calculate the total cost of the loan over its term (monthly repayments x number of months + all upfront fees) for the most accurate comparison.
Related Guides
- Best Home Loan Rates - compare today's lowest rates
- How to Refinance Your Home Loan - step-by-step refinancing guide
- Fixed vs Variable Home Loan - which loan type suits you
Limitations of the Comparison Rate
The comparison rate is not perfect. It does not account for:
- Offset accounts: Money held in offset reduces your effective rate, but this is not reflected in the comparison rate
- Extra repayments: If you plan to make extra payments, the comparison rate overstates your true cost
- Loan amount differences: The standard is calculated on $150,000, but your loan may be much larger or smaller, changing the fee-to-interest ratio
- Rate changes: For variable loans, the comparison rate assumes no rate changes over the loan term - obviously unrealistic
Despite these limitations, the comparison rate remains the single best standardised tool for comparing loan costs. Just be aware of what it does and does not capture.
Personal Loan Comparison Rates
The comparison rate standard for personal loans is calculated on a $30,000 unsecured loan over 5 years. This differs from the home loan standard ($150,000 over 25 years), so you cannot directly compare a home loan comparison rate against a personal loan comparison rate. Always compare like with like.
Frequently Asked Questions
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