You have two loans in front of you. One advertises a lower interest rate, the other a lower annual fee, and each displays a second, slightly higher percentage underneath the headline number. That second figure is the comparison rate, and it is the number most borrowers glance at and misinterpret.
This guide explains what a comparison rate is built to show, where it stops being a reliable guide, and how to use it as one input in a decision rather than as the decision itself.
What the comparison rate is designed to show
A lender advertises two numbers for the same loan. The interest rate is the price of the money you borrow. The comparison rate is an attempt to express that interest rate together with certain fees of that loan as a single percentage, so that two different loans can be placed on one scale.
The problem it solves is real. A loan with a low headline rate and a substantial annual fee can cost more over time than a loan with a slightly higher rate and no ongoing fee. Comparing headline rates alone hides that. The comparison rate is meant to surface it.
The useful way to read it is this: the interest rate plus the fees this lender was required to count, expressed as if they were interest. It does not contain any information you could not find yourself in the loan's fee schedule — it repackages that information into one figure.
Why the number is worth reading at all
Moneysmart, ASIC's consumer money site, notes that your home loan might be the biggest debt you hold for the longest period of time, and that even small differences in your mortgage interest rate can make a big difference to the long-term cost. That is the entire argument for looking past the headline rate: over 25 or 30 years, a fraction of a percentage point compounds into real money.
Moneysmart also suggests using a mortgage calculator to work out what your repayments would be and what the total cost of the loan would be, depending on the interest rate and the length of the loan — rather than relying on a single advertised figure. That advice applies to the comparison rate too.
Where a comparison rate stops being a good guide
The comparison rate is a shortcut, and shortcuts are only safe when you know what they omitted. The main limits:
- It is calculated on a standardised example, not on your loan. The rules set a standard loan amount, term and repayment basis. Your deposit, loan size, term and repayment frequency will differ, and every difference changes which loan is genuinely cheaper. The lender's comparison rate warning states the assumptions used — read it.
- It assumes the loan runs its full term. If you expect to sell, refinance or pay the loan out early, upfront establishment and discharge costs weigh more heavily than the comparison rate implies.
- Not every fee is counted. Some ongoing fees are included; fees that depend on how you actually use the loan generally cannot be built into a standard example. Which fees must be included is set by the current rules and shown in the comparison rate warning. Confirm it rather than assuming it.
- It does not price features. Offset accounts, redraw, the ability to make extra repayments, portability between properties, and the option to split between fixed and variable can be worth more or less than a few basis points, depending entirely on how you will use the loan.
- It reflects the loan as advertised today. For a variable loan, the rate can move. Moneysmart treats the fixed-versus-variable choice as a decision in its own right, and the comparison rate does not tell you which way rates will go.
- Packages distort it. If a single fee covers a transaction account, credit card or insurance, the comparison rate captures the cost but not the value you get back from it.
- It says nothing about eligibility, or about the cash you need on settlement day. Stamp duty, valuation, conveyancing and lenders mortgage insurance sit outside it entirely.
How to read it in practice
Work through these in order for each loan you are seriously considering:
- Confirm both figures are on the same basis. Same loan amount, term and repayment type. Two comparison rates built on different assumptions are not comparable.
- Read the comparison rate warning. It sets out the assumptions and warns that the figure applies to the example given, not to your circumstances.
- Note the gap between the headline rate and the comparison rate. A wide gap signals meaningful fees. Then find out what those fees actually are.
- List the fees yourself. Application or establishment fee, annual or monthly service fee, package fee, valuation, settlement, discharge, and any ongoing account fee. Ask which of these the comparison rate includes.
- Separate out behaviour-dependent fees. Late payment fees, redraw fees, offset fees, and break costs on a fixed loan vary with what you do. By nature they sit outside a standard example.
- Run your own numbers. Put your real loan amount and term into a mortgage calculator and compare total cost, not just the monthly repayment.
- Re-check after any rate change, and again whenever you review the loan.
Comparison rate versus headline rate
| Headline interest rate | Comparison rate | |
|---|---|---|
| Price of borrowing | Yes | Yes |
| Certain known fees of the loan | No | Yes, as required by the current rules |
| Fees that depend on how you use the loan | No | Generally not — verify |
| Your actual loan amount and term | No | No, a standard example is used |
| Loan features (offset, redraw, splits) | No | No |
| How rates or fees may change later | No | No |
The comparisons that mislead most often
- Fixed versus variable. The two figures are built on different assumptions about the future. Ask what rate applies once any fixed or introductory period ends.
- Introductory or honeymoon rates against standard rates. A low initial comparison rate may not describe the loan you will be repaying for most of the term.
- Basic loan versus packaged loan. The package fee may be buying things you would otherwise pay for separately; the comparison rate counts the cost, not the offsetting value.
- Small loans or short hold periods. Where upfront costs dominate, a difference of a few basis points in the comparison rate is not what decides the outcome.
Questions to put to the lender or broker
- Which fees are included in this comparison rate, and which are not?
- What loan amount, term and repayment type was it calculated on?
- What happens to the rate and the fees when any fixed or introductory period ends?
- Can I make extra repayments, and is there a fee for doing so?
- Is there an offset account, and does it carry a fee?
- What are the discharge and refinancing costs if I leave early?
- Can you show me the total cost over my actual term, using my actual loan amount?
Your next step
Take the two loans you are most serious about. For each, write down the headline rate, the comparison rate, the fees included in it, and the fees that are not. Then compare total cost using your real numbers rather than a standard example. If the comparison rates sit within a few basis points of each other, decide on fees, features and flexibility instead — and confirm every figure with the lender before you apply.
You can keep working through current offers and fee structures in our home loan guides at /money/home-loans/, or start with what you might be able to borrow and what it would cost at /match/.
General information only
This article is general information about how home loan comparison rates work. It is not legal, tax, credit or financial advice, and it does not take account of your objectives, financial situation or needs. It does not recommend or rank any lender or product, and no approval, saving or outcome is promised. The rules governing how a comparison rate is calculated and which fees must be included are set by law and can change — check the current requirements on Moneysmart and confirm all figures, fees and assumptions with the lender or broker before relying on them.