What is a comparison rate?

The purpose of the comparison rate is to help you determine the true cost of a loan and compare loans offered by different banks and mortgage providers.

The difference between a comparison rate and an interest rate

The main difference between a comparison rate and an interest rate is that a comparison rate includes the interest rate, as well as some of the extra fees associated with your loan.

Interest rate

When you buy a home, it’s likely you’ll need to borrow money from a bank or mortgage provider to pay for the property. The interest rate is the amount the bank will charge you on the funds you’ve borrowed. Interest rates are calculated as a yearly percentage of the total amount borrowed.

See our home loan borrowing power calculator to work out how much you can borrow.

See our personal loan borrowing power calculator to work out how much you can borrow.

Comparison rate

Since the interest rate doesn’t include the other costs associated with a home or personal loan, a comparison rate can be helpful when comparing different loan offers. The comparison rate gives you a better indication of the true cost of the loan and is generally higher than the interest rate, because it takes into account additional costs, such as:

• Application fees
• Establishment fees
• Ongoing account keeping fees or charges
• Exit or discharge fees.
   

If the comparison rate is a lot higher than the interest rate, this may indicate there are some significant ongoing costs associated with the mortgage apart from the interest charges. If the comparison rate is similar to the interest rate, this may indicate there are minimal additional fees and charges to take into account for the overall cost of the loan.

Why is the comparison rate important?

It’s important to remember that a low advertised interest rate may not be the best option for you if the comparison rate is significantly higher.

It’s also important to take into consideration other features of the loan to see what works for you, your family and your financial goals. You might, for example, consider whether you will choose an interest-only versus a principal and interest loan.

Comparison rates allow you to compare different home loans. They’re a good tool to help you understand how the cost of one loan might compare to another, so you can choose the right home loan for your circumstances.

How is the comparison rate calculated?

The formula for calculating a comparison rate is regulated by the National Credit Code. All Australian financial institutions and mortgage providers use the same formula. Comparison rates were created by the Australian government to offer more transparency to people shopping the home loan market.

Things to consider around comparison rates

Comparison rates should be considered as a guide only and can vary depending on your personal situation.

One important thing to remember about comparison rates is that they should be used as a guide only. This is because the rates are defined by legislation and calculated on a loan of $150,000 over a 25-year term for a home loan – not your personal situation. The average mortgage size in Australia is much higher than $150,000 and your loan term may be longer or shorter than 25 years.

What’s included in the comparison rate?

• The interest rate
• Application fees associated with the loan
• Settlement fees charged by the bank
• Ongoing account keeping fees associated with the loan 
• Discharge or exit fees associated with the loan.
  

What’s not included in the comparison rate?

• Fees associated with optional features (such as an offset or redraw facility)
• Government fees and charges (such as stamp duty, mortgage registration and land tax)
• Late payment fees
• Lenders Mortgage Insurance.