Every home loan advertisement in Australia must show two rates: the interest rate and the comparison rate. The comparison rate is designed to show the true cost of a loan including fees. It's useful, but it has limits.
What the comparison rate includes
The comparison rate combines:
- The interest rate
- Most upfront fees (application, establishment, settlement)
- Ongoing fees (monthly or annual fees)
It's calculated on a standard example: a $150,000 loan over 25 years. That's set by law.
What it doesn't include
- Government fees and charges
- Break costs
- Fees that depend on events, like late payment or redraw fees
- Discharge fees
- Benefits like offset accounts or cashback
Where comparison rates can mislead
Because the calculation uses a $150,000 loan, fees have a bigger relative impact than they would on a typical loan today.
Example:
| Loan A | Loan B | |
|---|---|---|
| Interest rate | 6.29% | 6.44% |
| Annual fee | $395 | $0 |
| Comparison rate (approx.) | 6.64% | 6.44% |
Loan B looks cheaper by comparison rate. But on a $600,000 loan over 30 years, Loan A's lower rate saves about $706 a year in repayments. Subtract the $395 fee and Loan A is about $310 a year cheaper. Loan A probably comes with an offset account too.
So for larger loans, a package with a fee can be better value than its comparison rate suggests.
Introductory and fixed rates
For loans with an introductory "honeymoon" rate or a fixed period, the comparison rate blends the intro rate with the revert rate. It can help reveal when a low intro rate hides a high ongoing rate.
How to compare properly
- Use the comparison rate as a starting filter.
- Calculate actual costs for your loan size over the time you expect to keep the loan.
- Value the features. An offset account can save far more than a small rate difference.
- Check the ongoing rate after any discount period.
- Consider service and turnaround, especially if you're buying.
Frequently asked questions
Is a lower comparison rate always better?
Not always, especially for larger loans or if features like an offset matter to you.
Do all lenders have to show a comparison rate?
Yes, in advertising that includes an interest rate for consumer credit, under the National Credit Code.
Why does the warning say "this comparison rate is true only for the example given"?
Because the result changes with loan size, term and fees.
Want a comparison based on your actual loan size? Call Finfident on 02 6416 2142, or Call, Text or WhatsApp 0424 545 654.
Want to know if this applies to you?
Talk it through with a Finfident broker. It's free and there's no obligation.
