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Why does a comparison rate matter?

16 July 2020
Why does a comparison rate matter?

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Lenders often love to advertise low home loan interest rates, but comparison rates sometimes tell a different story. explains what a comparison rate it, how it’s calculated, and why it matters when it comes to choosing your next home loan.

What is the comparison rate?

The comparison rate is essentially the “true cost of the loan”. It uses a formula that takes the advertised interest rate and factors most of the extra fees and charges that come with the loan, then expresses this cost as a percentage per annum. For this reason, the comparison rate will often be slightly higher than the advertised rate, but it can sometimes be the same if there are no extra charges.

By law, the Australian government makes all lenders, banks and non-banks advertise a comparison rate whenever they advertise home loan rates, to make it easier for people to compare apples to apples, instead of apples to oranges.

How is the comparison rate calculated?

The comparison rate is calculated using a formula that considers:

  • Upfront fees (application fees, valuation fees, legal fees etc.);

  • Ongoing fees (monthly fees, package fees etc.); and

  • Discharge fees for when the loan is finished.

Comparison rates are uniformly calculated based on a loan amount of $150,000 with a loan term of 25 years, so it might not necessarily be 100% accurate since most mortgages are bigger than that now. Plus, a lot of home loans are now 30 years or longer. But the general idea is you can see how deceptively expensive a ‘low-rate’ loan might be.

Some low rates may be deceiving

With the Reserve Bank cash rate at a record low of 0.25% (July 2020), many lenders are putting out their own record-low rates. Many of these rates are sitting near or below that magical 1.99% figure. But some of these rates might be deceptively cheap, because of all the extra fees and charges.

For example, a fixed-rate home loan might have a “super cheap” rate of 2.15% p.a, but the comparison rate could be as high as 3.60% p.a. In this case, as a fixed-loan customer, your loan would automatically revert to the standard variable rate (SVR) when the fixed-term ends, which is usually quite high. Packaged loans too tend to have high fees, so a packaged loan with a low advertised rate could have a significantly higher comparison rate, since the package fees can be hundreds of dollars per year.

If your loan is like this, then it could be worth consider refinancing to a better one with a lower comparison rate.

Why the comparison rate matters

The comparison rate matters because it can give you an idea of whether loan is good value for money or not, since it indicates whether a loan has any large fees that may not be immediately obvious. Say you have two home loans:

  • One is a variable rate home loan, one is a fixed rate home loan

  • The variable loan has an interest rate of 2.50% p.a, the fixed one 2.30% p.a.

In this case, the variable rate home loan has almost no fees, and has a comparison rate of 2.55% p.a. In comparison, the fixed-rate loan has a much higher comparison rate of 4.00%, which makes it more expensive overall despite having a cheaper advertised rate.

Here’s another example:

Interest rate

Total fees & charges

Comparison rate 

Home loan A




Home loan B




While the comparison rate isn’t the be-all-end-all, it is important, as even a marginal difference in the interest rate on your loan can cost tens of thousands of dollars overall,

To find a home loan with both a low advertised rate and a low comparison rate, check out some of our home loans, or book an appointment with one of our friendly lending specialists.

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