Comparison rate explained: what it includes and when it misleads
What the comparison rate on an Australian home loan includes, why it uses a $150,000 loan over 25 years, and how to compare package and basic loans for your own loan size.
A home loan's comparison rate is a single percentage that combines the interest rate with most upfront and ongoing fees, so you can compare loans with different fee structures. Under the National Credit Code, lenders that advertise a home loan rate must also show the comparison rate, and for secured loans it is calculated on a standard $150,000 loan over 25 years. That standard size is the catch: if you borrow much more than $150,000, fees matter less to you than the comparison rate suggests, and a loan with an annual fee can be cheaper than it looks.
This guide is part of home loan rates and repayments in Australia. All rates and fees below are illustrative.
What goes into a comparison rate
The comparison rate is the rate that makes the present value of all repayments and fees equal to the loan amount. In practice it includes:
- the interest rate (including any introductory or fixed period, followed by the revert rate)
- upfront fees such as application, establishment, valuation and settlement fees charged by the lender
- ongoing fees such as an annual package fee or monthly account-keeping fee
It does not include:
- government charges, such as mortgage registration fees and stamp duty
- lenders mortgage insurance premiums
- fees that depend on what you do later, such as break costs, redraw fees, late payment fees or discharge fees
- the value of features like an offset account or a cashback
Every comparison rate advertisement must carry a warning that the rate is true only for the example given and that different amounts and terms will give different comparison rates.
Worked example: same loan, three ways to charge
Three illustrative loans on the standard $150,000 over 25 years:
| Loan | Interest rate | Upfront fees | Annual fee | Comparison rate (approx.) |
|---|---|---|---|---|
| Basic variable | 6.09% | $0 | $0 | 6.09% |
| Package variable | 5.79% | $600 | $395 | 6.18% |
| Low-rate with fees | 5.99% | $600 | $395 | 6.38% |
How the package figure is reached: the monthly repayment at 5.79% over 25 years is about $947.29. Add $395 once a year, and treat the $600 upfront fee as reducing the money you actually receive to $149,400. The rate that equates those payments with $149,400 is about 6.18%. The basic loan has no fees, so its comparison rate equals its interest rate.
On a $150,000 loan the basic variable wins: 6.09% against 6.18%.
Now test it on your loan size
Repeat the comparison on an illustrative $600,000 over 30 years:
- Basic variable at 6.09%: about $3,632.09 a month
- Package at 5.79%: about $3,516.70 a month
- Difference in repayments: $115.39 a month, or about $1,384.75 a year
The package costs $395 a year plus $600 at the start. Its repayment advantage of about $1,385 a year is far larger than the $395 fee, so after the first year's $600 setup fee the package is ahead by roughly $990 a year. The comparison rate pointed the other way because it assumed a $150,000 loan.
Repeat at $150,000 over 25 years and the package saves only about $329 a year in repayments, less than its $395 fee. A rough break-even for this example: the fee divided by the rate gap, $395 / 0.30% = about $131,700 of balance, before allowing for the upfront fee.
Fixed rates and the revert rate
For a fixed rate loan, the comparison rate blends the fixed rate for the fixed period with the lender's revert rate for the rest of the 25 years. A low fixed rate with a high comparison rate is a signal that the revert rate is high. Ask the lender what rate you would roll onto, and plan to review the loan before the fixed term ends; see home loan refinancing mistakes.
How to compare two offers properly
- Ask for the key facts sheet. Lenders must give you a key facts sheet for a home loan on request, and online calculators show one. It sets out the total amount to be repaid on your actual loan amount and term.
- Line up the rates for your situation. Same LVR band, same loan purpose (owner-occupier or investor), same repayment type.
- Price the fees in dollars. Upfront fees once, annual fees every year you expect to hold the loan.
- Value features you will use. An offset account saves interest only on money you actually keep there. See offset account vs redraw.
- Ignore features you will not use. A credit card fee waiver is worth nothing if you do not want the card.
Common misreadings
| Misreading | Why it is wrong |
|---|---|
| "Lowest comparison rate is cheapest for me" | Only true near $150,000 over 25 years |
| "The comparison rate includes LMI" | LMI and government fees are excluded |
| "A cashback lowers the comparison rate" | Cashbacks are not part of the calculation; value them separately |
| "Fixed comparison rate shows my fixed cost" | It mixes in the revert rate for the remaining years |
| "No comparison rate shown means no fees" | Check the fee schedule and key facts sheet |
Frequently asked questions
Is the comparison rate required by law?
Yes, where a lender advertises an annual percentage rate for consumer credit such as an owner-occupier home loan, the National Credit Code requires the comparison rate and a warning statement to appear with it.
Does the comparison rate include an offset account?
No. The comparison rate includes fees charged for the package that provides the offset, but not the interest you save by using it.
Why do two lenders' comparison rates differ when their interest rates are the same?
Because their fees differ. Two loans at the same rate can have different upfront fees, annual fees or monthly account fees.
Should I use the comparison rate when refinancing?
Use it as a first filter, then work out the dollar cost on your own balance and remaining term with the repayment calculator or the refinance calculator.
Sources
- ASIC Moneysmart — comparison rates and choosing a home loan
- ASIC — credit advertising obligations
- Federal Register of Legislation — National Consumer Credit Protection Act 2009 and the National Credit Code
