What Is a Comparison Rate on a Home Loan?

Why Is This Important?

Imagine two loans from different banks, each with an advertised rate of 5.25%. One might seem like a great deal until you realise it comes with $2,000 in hidden fees. That's where the comparison rate steps in. It reveals the real-world cost of the loan, so you don't get stung later.

And if you're like most borrowers, you're not just looking for the lowest number on a billboard, you want a loan that works for your budget long-term.

That's why comparison rates are required by law in Australia, they protect borrowers like you.

Why the Comparison Rate Exists

When you see a home loan advertised with a super low interest rate, it's easy to assume it's the best deal. But the reality is, interest rates don't tell the whole story.

Many lenders promote a competitive rate up front, but what they don't always highlight are the extra costs, like:

• Upfront application or establishment fees
• Monthly or annual account-keeping fees
• Valuation fees, settlement fees, and discharge costs

These charges can add thousands of dollars to your loan over time. And unless you're a mortgage expert, it can be hard to spot them until it's too late.

That's where comparison rates come in.

A Fairer Way to Compare Home Loans

The comparison rate was introduced in Australia under the National Consumer Credit Protection Act (NCCP) and is now a legal requirement when advertising most credit products, including home loans.

Its purpose is simple:

To give you a more straightforward way to compare different loan products, by combining the interest rate with most fees into one percentage.

This makes it easier for you, the borrower, to cut through the marketing and focus on what matters: cost of borrowing.

Example:

If two lenders both advertise a 5.25% interest rate, but one has a comparison rate of 5.40% and the other 5.85%, you instantly know which loan is likely cheaper over time, even before you dive into the fine print.

Why Lenders Must Show Comparison Rates

In Australia, all lenders are required by law to include a comparison rate alongside any advertised interest rate for a regulated consumer credit product.

Specifically, comparison rates must be displayed when:

• The loan is for personal or residential use
• A fixed interest rate is shown
• A variable interest rate is promoted
• Are there any fees or charges associated with the loan

This requirement exists to protect consumers from misleading offers and create transparency across the lending industry.

Why It Matters for You as a Borrower

As a borrower, you're making one of the most significant financial decisions of your life. A slight difference in rates or fees can mean tens of thousands of dollars over 25-30 years.

By understanding what a comparison rate means and why it's required, you give yourself the power to:

• Spot hidden fees
• Avoid marketing traps
• Compare loan products more confidently
• Save money over the life of your mortgage

What's Included (and Not Included) in a Comparison Rate?

You already know a comparison rate gives you a more accurate view of a home loan's real cost, but what exactly goes into calculating it?

Let's break down what's included and, just as importantly, what's not.

What's Typically Included in a Comparison Rate

A comparison rate is calculated based on a standard loan scenario, typically $150,000 borrowed over 25 years with principal-and-interest (P&I) repayments made monthly.

The calculation includes:

By rolling these into a single figure, the comparison rate gives you a more transparent snapshot of what you're actually paying, not just what's advertised.

What's Not Included And Why It Matters

While comparison rates are helpful, they aren't perfect. Some necessary costs and real-world variables are not included, such as:

Fixed-rate loans are particularly tricky, because once the fixed period ends, the loan usually reverts to a different interest rate, which can significantly change the cost. This isn't reflected in the comparison rate.

Why This Matters

If you're relying only on the comparison rate when choosing a home loan, you could still get caught out by:

• Selecting a product with costly redraw or offset features you don't need
• Being unaware of large early exit fees
• Underestimating the impact of LMI if your deposit is under 20%
• Misjudging the cost of a fixed-rate loan after the term ends

That's why it's essential to treat the comparison rate as a starting point, not the whole picture.

Tip: When we help our clients compare loans, we look beyond the comparison rate. We analyse the real cost based on your loan size, goals, and how you'll actually use the loan features. That's the kind of insight banks often don't provide.

How Is the Comparison Rate Calculated?

The comparison rate you see advertised isn't randomly chosen, it's calculated using a standardised formula set by law in Australia.

The goal is to help borrowers understand the real cost of a loan, factoring in more than just the interest rate.

The Standard Loan Scenario

By regulation, all lenders must calculate comparison rates using the same assumptions, which means you're comparing each loan on a level playing field in theory.

Here's what's assumed in the calculation:

This uniform scenario is why comparison rates help you quickly compare different home loan products at a glance, no matter which lender you're dealing with.

But Here's the Catch

Most home loans today exceed $150,000 and often have different terms, such as 30-year or interest-only periods. If that sounds like your situation, the comparison rate may be less relevant.

For example:

• A loan of $750,000 over 30 years will behave very differently than a $150,000 loan over 25 years.
• Fixed-rate loans might have a low comparison rate, but after the fixed period ends, your rate could spike.
• Interest-only loans aren't well reflected in the standard comparison rate formula.

So, while the comparison rate is a great starting point, it doesn't always reflect your actual borrowing scenario.

Case Study

Let's say two lenders both offer a 5.25% interest rate.

• Lender A: Charges $1,500 in setup and $10/month ongoing = 5.70% comparison rate
• Lender B: Waives setup and ongoing fees = 5.30% comparison rate

Winner: Lender B, even though both had the same advertised rate.

But what if you're borrowing $900,000 and plan to repay it in 10 years? That changes everything, and the standard comparison rate won't capture it.

Comparison Rate vs Interest Rate: What's the Difference?

When choosing a home loan, it's tempting to focus only on the interest rate, after all, it's the big number in the ad. But doing so can cost you more in the long run.

That's why it's critical to understand the difference between the interest rate and the comparison rate, and how each affects your mortgage.

At a Glance: Interest Rate vs Comparison Rate

What Each One Really Tells You

Interest Rate

This is the advertised cost of borrowing, expressed as a percentage of the loan amount per year. It determines how much interest you'll pay, but it doesn't include any additional fees, which can seriously affect your total cost.

Example:

A 5.00% interest rate sounds great… until you realise the loan comes with $2,500 in setup fees and $400/year in ongoing charges.

Comparison Rate

This is the more complete figure, it combines the interest rate with most upfront and ongoing fees. It's designed to show you the real cost of the loan over time, based on a typical scenario.

Why You Shouldn't Rely on One Alone

Scenario:

You're comparing two loans:

• Loan A: 4.95% interest rate | 5.65% comparison rate
• Loan B: 5.05% interest rate | 5.10% comparison rate

Which is cheaper?

Answer: Loan B, even though it has a slightly higher interest rate, it includes fewer fees overall. That's the kind of insight you get only from the comparison rate.

As mortgage brokers, we've seen it too many times, borrowers choose the lowest interest rate and later regret the surprise costs buried in the loan structure.

At Stryve Finance, we compare interest rates, comparison rates, loan features, and fee structures side by side, tailored to your specific borrowing needs. So you don't fall for headline numbers that don't tell the full story.

When Should You Use a Comparison Rate and When Should You Be Cautious?

Comparison rates are a great tool, but like any tool, they work best when used correctly. Understanding when to rely on them (and when to dig deeper) can help you avoid costly mistakes. You should definitely look at the comparison rate when you're:

1. Comparing loans across different lenders: Especially when interest rates are the same, the comparison rate exposes which loan has higher hidden fees.

2. Evaluating fixed vs variable options: Fixed-rate loans may have low upfront interest, but the comparison rate reveals the overall cost, including reversion fees and charges.

3. Choosing between basic and package home loans: Some loans come bundled with extras like offset accounts, credit cards, or insurance. The comparison rate helps highlight whether those perks are actually worth the extra cost.

4. Looking for a “set and forget“ home loan: If you plan to keep the loan for most of the term without making changes, the comparison rate is a reliable snapshot of long-term cost.

Use Comparison Rates as a Filter, Not the Final Answer

Think of the comparison rate as your first screening tool.

It's like reading a product label at the supermarket, it gives you a quick idea of what's inside. But to know if it's right for you, you still need to read the ingredients and consider your personal goals.

That's where we come in.

How We Help at Stryve Finance

When we compare loans for our clients, we don't stop at the interest rate. We break down:

• The comparison rate
• The real cost of the loan based on your life plans
• The value of optional features you'll actually use
• How the loan performs if you sell, refinance, or pay off early

Because even a 0.20% difference can add up to thousands of dollars, and that's money better in your pocket.

Want to See the Real Cost of Your Loan?

Don't settle for surface-level comparisons.

Book a free call with Stryve Finance and get tailored, transparent advice from brokers who compare the whole picture, not just the headline rate.

Frequently Asked Questions About Comparison Rates

What does a comparison rate tell you?

A comparison rate shows the true cost of a home loan, combining the interest rate with most upfront and ongoing fees. It's designed to help you compare loan products fairly, even if two loans have the same interest rate.

Why is the comparison rate higher than the interest rate?

In most cases, the comparison rate is higher because it includes extra costs, such as application fees, account-keeping charges, and annual package fees, which the interest rate alone does not reflect.

Does the comparison rate include all fees?

No, it includes most common fees, like setup and ongoing charges, but it doesn't include:

• Redraw or offset account fees
• Early exit or break costs
• Lender's Mortgage Insurance (LMI)
• Government fees like stamp duty

This is why it's important to look beyond the comparison rate, especially for more complex loans.

Is the comparison rate accurate for all borrowers?

Not always. The comparison rate is based on a standard loan:

• $150,000 loan amount
• 25-year loan term
• Monthly principal & interest repayments

If your situation differs (e.g. larger loan, shorter term, interest-only), the comparison rate may not reflect your actual cost.

Should I use comparison rates when refinancing?

Yes, comparison rates are a great way to quickly compare refinance options, especially if you're switching lenders or looking to cut fees. Just keep in mind your new loan structure might differ from the comparison rate's assumptions.

Are comparison rates applicable for fixed-rate loans?

They can be, but be cautious. Comparison rates for fixed-rate loans don't account for the revert rate (the interest rate that applies after the fixed term ends), which can significantly change the long-term cost of the loan.

How can I find the best comparison rate?

Rather than searching dozens of bank websites, speak to a mortgage broker like Stryve Finance. We compare rates across 50+ lenders and tailor results to your exact loan amount, term, and goals, so you see the real numbers.