When comparing mortgages, the lowest advertised interest rate can hide costs that make your home loan more expensive. Understanding what is a comparison rate helps you look beyond the headline figure and evaluate the real cost of borrowing.
This guide explains how comparison rates work in Australia, which fees they include, and why standardised calculations can mislead you. You will also learn how package fees, offset accounts and loan features affect your decision.
Comparison Rate Key Takeaways
| Key Point | What You Need to Know |
| Comparison rates | They combine the interest rate with certain loan fees into one annual percentage figure. |
| Standardised assumptions | Lenders generally calculate advertised comparison rates using a $150,000 loan over 25 years. |
| Included fees | The calculation includes certain upfront and ongoing charges, but excludes some costs. |
| Package fees | Annual package fees can affect your actual borrowing costs differently, depending on your loan balance. |
| Loan size | A comparison rate based on $150,000 may not accurately represent your costs on an $800,000 mortgage. |
| Loan features | Offset accounts, redraw facilities and other features can change the value you receive. |
| Best comparison method | Compare the comparison rate, actual fees, loan features and your expected repayment costs together. |
What Is a Comparison Rate And Why Does It Matter?
A comparison rate is a yearly percentage that combines a loan’s interest rate with certain fees and charges. It helps you understand the cost of borrowing beyond the lender’s advertised rate.
For example, a lender might advertise an interest rate of 5.80% per annum. However, its comparison rate could be 6.05% after accounting for eligible fees.
The difference suggests that the loan costs more than the advertised interest rate alone indicates. However, the comparison rate does not capture every possible cost or saving.
Australian consumer credit laws regulate how lenders calculate and disclose comparison rates. The purpose is to make it easier for you to compare similar credit products.
Advertised Interest Rate Vs Comparison Rate
These two figures serve different purposes when you assess a mortgage.
| Feature | Advertised Interest Rate | Comparison Rate |
| Main purpose | Shows the interest charged on the loan. | Combines interest with certain loan fees. |
| Upfront fees | Not reflected in the rate itself. | Includes eligible fees in the calculation. |
| Ongoing fees | Not reflected in the rate itself. | Includes eligible ongoing charges. |
| Additional features | Does not show their value. | Does not fully reflect feature-related savings. |
| Best use | Estimates interest repayments. | Helps compare borrowing costs across similar products. |
Consequently, neither figure should determine your decision alone. You need to examine both alongside the loan’s conditions.
How Is A Comparison Rate Calculated?
Lenders use a prescribed calculation method to produce the comparison rate. The calculation converts the interest and eligible charges into a comparable annual rate.
The standard example for a home loan uses $150,000 borrowed over 25 years. This benchmark allows borrowers to compare advertised products using a consistent starting point.
However, the calculation relies on assumptions about the loan amount, repayment term and applicable fees. Your actual borrowing circumstances may differ significantly.
Which Fees Are Included?
The calculation generally accounts for eligible fees that lenders can identify when preparing the comparison rate.
These can include:
- Loan establishment fees: These are eligible upfront charges for setting up your mortgage.
- Ongoing monthly fees: These are regular administration or service charges that apply throughout the loan.
- Annual account fees: These may be included when they form part of the applicable borrowing costs.
- Other eligible credit charges: Certain additional fees may affect the calculation when the law requires their inclusion.
The precise result depends on the product’s fee structure and the applicable calculation rules.
Which Costs Are Excluded?
A comparison rate does not capture every expense or potential saving. ASIC explains that government charges and fees triggered by particular events may sit outside the calculation.
Important exclusions can include:
- Government charges: These may include stamp duty or mortgage registration fees, depending on your circumstances.
- Redraw fees: A fee charged when you use a redraw facility may not appear in the advertised comparison rate.
- Early repayment costs: Certain charges associated with ending a loan early can be excluded.
- Conditional fees: Charges that arise only when you use particular services may not be included.
- Offset account benefits: Savings from keeping money in an offset account are not fully represented by the comparison rate.
- Fee waivers: A discount or waiver available to you may change your actual costs without changing the published example.
Therefore, treat the comparison rate as a useful starting point rather than a complete statement of your future expenses.
The $150,000 Benchmark Trap: Why Bigger Mortgages Can Cost More
The standardised calculation has an important limitation. A comparison rate based on $150,000 may not accurately represent the cost of borrowing $800,000 or more.
This matters because Australian property purchases can require substantial borrowing. Yet the advertised comparison rate uses the same prescribed benchmark rather than your intended loan amount.
The issue becomes particularly important when lenders charge annual package fees.
How Annual Package Fees Affect Your Comparison
Suppose a lender charges a $395 annual package fee. The fee is a fixed amount, regardless of whether your mortgage is $150,000 or $800,000.
However, the fee represents a much larger proportion of a smaller loan.
| Loan Amount | Annual Package Fee | Fee As A Percentage Of Loan Amount |
| $150,000 | $395 | 0.263% |
| $600,000 | $395 | 0.066% |
| $800,000 | $395 | 0.049% |
| $900,000 | $395 | 0.044% |
These figures show the annual fee divided by the original loan amount. They are not the comparison rate or the precise additional interest rate created by the fee.
The actual effect on a comparison rate depends on the full calculation, repayment schedule and applicable loan charges.
Nevertheless, the table highlights an important point: the same fixed fee represents a smaller share of a larger mortgage.
Why The Published Comparison Rate Can Mislead
Imagine two lenders offering similar interest rates but different fee structures.
Lender A charges a lower interest rate and a $395 annual package fee. Lender B charges a slightly higher interest rate without that fee.
The standardised calculation may favour one product under its $150,000 example. However, your result could differ when you borrow $800,000.
You must compare the actual repayments and fees for your intended loan amount. Otherwise, you might choose a product based on a rate that does not reflect your circumstances.
The benchmark itself is not necessarily misleading or incorrectly calculated. The problem arises when borrowers interpret it as a personalised estimate.
For larger mortgages, request the relevant Key Facts Sheet and compare the figures for your intended borrowing amount. ASIC’s Moneysmart guidance recommends using these standardised documents to assess costs and features.
How To Compare Two Home Loans Properly
A sound comparison considers the interest rate, fees, repayment conditions and features together. This approach helps you avoid choosing a loan that looks cheaper but costs more in practice.
Step 1: Compare The Interest Rates
Start with each lender’s advertised interest rate and determine whether it is fixed, variable or introductory.
A lower rate can reduce interest costs, particularly on a large outstanding balance. However, you should check whether the rate changes after an introductory period.
Step 2: Examine The Comparison Rates
Next, compare the published comparison rates for the products you are considering.
A large gap between the advertised interest rate and comparison rate can indicate that eligible fees increase the calculated cost. However, the gap alone does not reveal every charge or saving.
Step 3: Calculate Your Actual Repayments
Use the same loan amount, term and repayment structure when comparing products. This keeps the estimates consistent.
For example, compare an $800,000 principal-and-interest loan over 30 years with another loan using those same assumptions. Include known fees wherever possible.
Read more: Home loan repayment calculator Australia
Step 4: Check Upfront And Ongoing Fees
Review establishment fees, annual package charges and monthly service fees separately. Also, check whether the lender waives any charges under specific conditions.
A loan with a lower published comparison rate might still require you to pay additional costs outside that calculation.
Step 5: Review The Loan Features
Finally, assess whether the product provides the features you need. An offset account, flexible extra repayments or a suitable redraw facility may justify additional costs.
However, only count a feature’s benefit when you expect to use it.
How Offset Accounts And Redraw Facilities Affect Costs
Two loans can have similar comparison rates but deliver different value because their features work differently.
Offset Accounts
An offset account is a transaction account linked to an eligible home loan. Its balance reduces the amount of debt on which the lender calculates interest.
For example, suppose you owe $800,000 and maintain $30,000 in a fully offset account. Your lender may calculate interest on $770,000 instead.
The actual benefit depends on the loan terms, interest rate and balance maintained in the account. Some lenders also charge package fees or higher interest rates for products with offset facilities.
Therefore, compare the potential interest savings against the additional costs. A published comparison rate does not calculate the benefit based on your expected savings balance.
Redraw Facilities
A redraw facility allows you to access eligible extra repayments you’ve made towards your home loan.
For example, you might pay an additional $10,000 above your required repayments. Your lender may allow you to withdraw some of that money later.
However, redraw conditions differ between lenders. Some products impose withdrawal fees, minimum redraw amounts or other restrictions.
An offset account and redraw facility are not identical. An offset account generally holds separate deposit funds, while redraw accesses eligible additional repayments.
Review the access rules and charges before choosing between these features. Their practical value depends on how you manage your money.
How Comparison Rates Affect Borrowing Power
Your borrowing power depends on your income, expenses, existing debts, deposit and the lender’s assessment policies.
A comparison rate is not the rate a lender necessarily uses to assess your ability to repay. Instead, lenders assess applications using their applicable serviceability policies and interest-rate assumptions.
A loan’s actual interest rate affects your required repayments. Higher repayments can leave less income available for other commitments.
Additionally, annual package fees and monthly charges can increase the money you need to maintain your mortgage. Therefore, include recurring fees when planning your budget.
Before applying, consider whether you could manage repayments if interest rates rose. You should also account for council rates, insurance, maintenance and other ownership expenses.
For Buying a house, understanding these costs can help you set a realistic budget. A home buyer should assess affordability alongside the property’s purchase price and deposit requirements.
Common Mistakes To Avoid When Comparing Home Loans
Even a careful borrower can overlook important details when comparing advertised rates.
- Choosing the lowest advertised interest rate: A low headline rate does not account for every eligible fee or excluded charge.
- Treating the comparison rate as personalised: The standard calculation uses prescribed assumptions rather than your exact borrowing circumstances.
- Ignoring annual package fees: A recurring fee can affect your overall costs, especially when the loan balance is relatively small.
- Overlooking introductory periods: A discounted initial rate may not continue for the entire loan term.
- Assuming every feature is free: Offset accounts, redraw facilities and other options can carry fees or eligibility conditions.
- Comparing different loan terms: A 25-year loan and a 30-year loan can produce different repayments and total interest costs.
- Forgetting conditional charges: Costs associated with early repayment or particular transactions may sit outside the published comparison rate.
- Ignoring your cash flow: A loan can look attractive on paper but still provide insufficient flexibility for your financial needs.
Avoiding these mistakes helps you make a more informed decision. More importantly, it prevents a single percentage figure from dominating your assessment.
Conclusion: Look Beyond The Headline Rate
A comparison rate is a valuable tool for understanding the cost of borrowing. It combines the interest rate with certain fees, helping you compare mortgage products more consistently.
However, its standardised $150,000 loan example cannot tell you exactly what an $800,000 mortgage will cost. Annual package fees, excluded charges and useful loan features can change the outcome.
The smartest approach combines comparison rates with actual repayment estimates, fee disclosures and the features you expect to use. Review the relevant Key Facts Sheet and check the conditions before making your decision.
Ultimately, the best home loan is not necessarily the one with the lowest advertised rate. It is the one that offers competitive borrowing costs, suitable features and repayments you can comfortably manage.
Financial disclaimer: This article provides general information only and does not consider your personal financial circumstances. Loan costs, eligibility requirements and product conditions vary between lenders. Check the relevant loan documents and seek professional advice if needed.
Frequently Asked Questions
1. What Is A Comparison Rate For A Home Loan?
A comparison rate combines a loan’s interest rate with certain fees and charges. It helps you compare the cost of similar home loan products, although it excludes some costs and potential savings.
2. What Is The Difference Between An Interest Rate And A Comparison Rate?
The interest rate determines the interest charged on your outstanding loan balance. The comparison rate incorporates eligible fees into an annual percentage figure, giving you a broader view of borrowing costs.
3. Why Is The Comparison Rate Based On $150,000?
Australian regulations prescribe $150,000 over 25 years as the standard example for relevant secured lending advertisements. This creates a consistent benchmark, but it may not reflect the costs of your actual loan.
4. Does A Comparison Rate Include All Home Loan Fees?
No. It includes eligible fees and charges under the applicable rules. Government charges, certain conditional fees and potential savings from features such as offset accounts may not be reflected.
5. Can A Home Loan Have A Lower Interest Rate But A Higher Comparison Rate?
Yes. A loan with substantial eligible fees can have a higher comparison rate despite offering a lower interest rate. Always examine the fee structure alongside both figures.
6. Is A Lower Comparison Rate Always Better?
No. A lower comparison rate can indicate lower borrowing costs under the standard calculation. However, your actual costs depend on the loan amount, fees, features and circumstances.
7. What Is A Comparison Rate Schedule?
A comparison rate schedule refers to information presenting comparison rates for relevant loan products or prescribed examples. Check the lender’s current disclosures and Key Facts Sheet to understand the figures and assumptions that apply.
8. Where Can I Find The Most Accurate Comparison Rate For My Loan?
Start with the lender’s published comparison rate and request a Key Facts Sheet for your intended borrowing amount. Compare repayment estimates, establishment fees, ongoing charges and loan features before deciding.
