Every home loan advertisement in Australia shows two rates. The first is the interest rate, which is what the lender charges on your balance. The second is the comparison rate, which is usually a little higher. The gap between them is a rough measure of the fees, or the higher rate later in the loan, that add to the cost.
The comparison rate is useful, but it is a blunt tool. It assumes a loan far smaller than most people borrow, it assumes you keep the loan for 25 years, and it ignores features that can save you money. This guide shows how the figure is built, with the arithmetic, and sets out a better way to compare two loans.
What a comparison rate is and why lenders must show it
The comparison rate rules sit in the National Credit Code, which is a schedule to the National Consumer Credit Protection Act 2009 and is administered by ASIC. In general terms, if an advertisement for fixed term consumer credit states an interest rate, it must also state a comparison rate, calculated with a prescribed formula, and carry a warning about its accuracy. Every lender uses the same formula, so the figures can be lined up against each other.
You will see the standard warning in the fine print of rate tables: the comparison rate is true only for the examples given and may not include all fees and charges, and different terms, fees or loan amounts might result in a different comparison rate. For background on how the headline rate itself is set, see understanding home loan interest rates.
The $150,000 over 25 years benchmark and why it distorts
For home loans, comparison rates are calculated on a secured loan of $150,000 repaid over 25 years. The benchmark dates from the early 2000s, when comparison rate laws were first introduced by the states and territories, and it carried across into the national regime. Most new loans are now several times that amount, and 30 years is the most common loan term.
The size of the sample loan matters because most loan fees are flat dollar amounts. A $395 annual fee is the same whether you borrow $150,000 or $900,000. Spread over a small balance, a flat fee adds a lot to the percentage cost. Spread over a large balance, it adds very little. The comparison rate therefore overstates the effect of fees for a typical borrower.
The 25 year assumption distorts in the other direction for upfront costs. The formula spreads an establishment fee across 25 years. Many borrowers refinance or sell within a few years, so upfront and exit fees cost them more per year than the comparison rate implies.
What fees are included and excluded
The formula includes the interest rate, any known change to that rate such as a revert rate after an introductory or fixed period, and the fees that every borrower on that product must pay. It leaves out charges that depend on what you do or on events that may not happen, and it gives no credit for features that reduce interest.
| Generally included | Generally not included |
|---|---|
| The interest rate, including any revert rate | Government charges such as stamp duty and mortgage registration fees |
| Application or establishment fees | Conditional fees such as break costs, redraw fees and late payment fees |
| Valuation, settlement and legal fees charged by the lender as standard | Lenders mortgage insurance |
| Ongoing monthly, annual or package fees | Interest saved through an offset account or extra repayments |
| Standard discharge fees at the end of the loan | Fee waivers, cashback offers and negotiated discounts |
This is the commonly quoted position. Treatment depends on whether a fee is known and payable by all borrowers when the rate is calculated.
The exclusions can be worth more than the inclusions. Lenders mortgage insurance can cost thousands of dollars on a low deposit loan. Break costs on a fixed rate home loan can do the same if you exit early. A loan with an offset account often shows a higher comparison rate because of its package fee, yet the interest saved may outweigh that fee many times over.
Worked example: a $395 annual fee on $150,000 and on $600,000
Take a loan at an illustrative 6.00% a year with a $395 annual fee and no other fees, repaid monthly over 25 years. Assume the fee is charged at the end of each year. The comparison rate is the single interest rate that would produce the same stream of payments if there were no fees. Running that calculation on two loan sizes gives very different answers.
| Loan amount | Interest rate | Annual fee | Fee as % of starting balance | Comparison rate |
|---|---|---|---|---|
| $150,000 (the benchmark) | 6.00% | $395 | 0.26% | 6.35% |
| $600,000 | 6.00% | $395 | 0.07% | 6.09% |
Illustrative figures, rounded to two decimal places. Calculated over 25 years with the fee charged at the end of each year.
On the benchmark loan, the fee lifts the comparison rate by about 0.35 percentage points. On $600,000 it lifts it by about 0.09 points, roughly a quarter as much. The effect is larger than the simple fee percentage because the fee stays at $395 while the balance falls each year. The advertised figure for this loan would be 6.35%, even though a $600,000 borrower is effectively paying close to 6.09%.
Why introductory and honeymoon rates push the comparison rate up
An introductory or honeymoon rate is a discounted rate for the first one to three years, after which the loan reverts to a higher ongoing rate. The comparison rate formula counts both. Because the sample loan runs for 25 years, the higher revert rate applies for most of the calculation, and the comparison rate lands close to the revert rate, not the headline rate.
Here is an example with no fees at all. A $150,000 loan over 25 years has an illustrative introductory rate of 5.49% for two years, then reverts to 6.49%. Repayments are about $920 a month for the first two years, then about $1,006 a month. The comparison rate works out to about 6.29%, which is 0.80 points above the advertised rate.
Here the comparison rate is doing its job. A wide gap with few fees is a signal to find the revert rate and ask what you would pay after the discount ends. If you plan to refinance when the introductory period finishes, the introductory rate and the costs of refinancing matter more.
How to compare loans properly: total cost over your holding period
A better test is the total dollar cost over the period you expect to keep the loan, using your own loan amount. Add the interest, the upfront fees, the ongoing fees for those years and the exit costs. Then subtract anything of real value to you, such as interest saved through an offset. Many borrowers review or refinance within three to five years, so that is a sensible period to test.
| Over 5 years on $600,000 (30 year term) | Loan A: 5.99%, $395 annual fee | Loan B: 6.09%, no fees |
|---|---|---|
| Advertised comparison rate | 6.34% | 6.09% |
| Monthly repayment | $3,593 | $3,632 |
| Interest paid over 5 years | $173,864 | $176,869 |
| Fees paid over 5 years | $1,975 | $0 |
| Total cost over 5 years | $175,839 | $176,869 |
| Balance owing after 5 years | $558,257 | $558,944 |
Illustrative rates only. Assumes principal and interest repayments, no rate changes and no offset balance.
Loan B wins on the advertised comparison rate by a clear margin. On a $600,000 loan held for five years, Loan A costs about $1,030 less and leaves you owing about $690 less. On a $150,000 loan the result flips and Loan B is cheaper. Test your own numbers with our home loan calculators, or ask the lender for a Key Facts Sheet, which shows a personalised comparison rate for your amount and term.
- Compare like with like: variable rate loans against variable, and fixed loans against the same fixed term.
- Ask for the revert rate on any fixed or introductory offer, and the discharge and break cost terms.
- A broker can run the same comparison across many lenders. See mortgage broker vs bank.
Why the comparison rate is not an APR-style personalised rate
Some countries require a personalised cost figure. In the United States, for example, lenders disclose an annual percentage rate calculated on the borrower's actual loan amount, term and finance charges. The Australian comparison rate in advertising is not that. It is a standardised figure for a sample loan, identical for every reader whatever they plan to borrow.
The terminology adds to the confusion. In an Australian loan contract, the words annual percentage rate simply mean the interest rate, with fees listed separately. So neither number in your paperwork is an all-in personal rate. The closest thing is the personalised comparison rate on a Key Facts Sheet, and even that leaves out conditional fees, government charges and offset savings.
Use the comparison rate to
Screen a long list of loans quickly. Spot products where the gap between the headline rate and the comparison rate is wide, then find out whether fees or a revert rate explain it. Compare two similar products from different lenders at a glance.
Do not use it to
Pick a winner between two loans for your actual loan size. Judge the value of an offset account or a package. Estimate your repayments. Assess loans you expect to hold for only a few years, where upfront and exit costs weigh more.
Common mistakes with comparison rates
These errors most often lead borrowers to the wrong loan.
Ranking loans by comparison rate alone
On a loan four or five times the benchmark size, fees matter far less than the comparison rate suggests. A loan that ranks poorly because of a package fee may be cheaper in dollars once your real balance is used.
Calculate total cost in dollars on your own loan amount.
Ignoring a wide gap between the rates
A comparison rate well above the headline rate means high fees or a higher revert rate later. Borrowers who only read the headline rate get caught when an introductory or fixed period ends and repayments jump.
Ask what explains the gap before you apply.
Assuming every cost is included
Lenders mortgage insurance, government charges, break costs and redraw fees are not in the figure. On a low deposit loan or a fixed loan you exit early, these excluded costs can exceed every fee that was included.
Ask for a full fee schedule and read the conditional fees.
Comparing fixed loans against variable loans
A two year fixed comparison rate and a variable comparison rate measure different things. The fixed figure blends two years at the fixed rate with 23 years at a revert rate you may never pay.
Compare the same product type and the same fixed term.
