Comparison Rate

A comparison rate is a single percentage figure that combines a loan's advertised interest rate with most of the fees and charges attached to it, including establishment fees and ongoing monthly or annual account fees. Australian credit law requires lenders to display it alongside the headline rate in most advertising, which is why you see that little asterisk and second number in every home loan ad. For home loans, the figure is calculated on a standardised example loan of $150,000 over 25 years, so everyone is singing from the same song sheet.

The important thing to understand is that it is an approximation, not a prophecy. It excludes costs like government charges, early exit fees, and fee waivers, and it cannot capture quirky features like offset accounts. Your actual loan will be bigger, different, or structured differently from the standard example. Moneysmart at moneysmart.gov.au recommends using it to shortlist lenders, then checking real numbers on your actual loan before you sign.

Lenders take the nominal interest rate and add the effect of unavoidable fees, then express the total as one annualised percentage. Establishment fees, valuation fees, and ongoing account fees all get folded into the calculation. The formula assumes a standard loan size and term, so a $10 monthly fee looks very different on $150,000 than on your actual $750,000 mortgage. That standardisation is the whole point, because it stops lenders from hiding behind creative fee structures. Anything carefully kept outside the calculation, like conditional waivers and exit costs, remains for you to find.

In practice, you use it as a filter, then verify the details yourself. Shortlist two or three loans with the lowest comparison rates and identical features. Then model each one on your actual borrowing amount using the loan repayments vs salary calculator at loan repayments vs salary calculator. Finally, check what each option costs over your planned timeframe, because early exit fees and offset quirks live outside the comparison rate. If two candidates land within a whisker, call both lenders and negotiate, because published rates are famously softer than they look.

Because lenders know you are easily dazzled, that is why. A headline rate of 6.10 per cent with $395 in annual fees can cost you more than a boring 6.30 per cent loan with no fees, depending on your loan size. The comparison rate is the one number the law forces lenders to show that is close to honest.

A colleague named Brent (yes, that Brent) once chose his home loan purely on the headline rate in a glossy brochure. The loan had a $10 monthly package fee and a $600 establishment fee, which nudged the true comparison rate 0.35 points higher. Over his $600,000 loan, that little oversight cost him roughly $1,900 in the first five years. Brent now reads the asterisked fine print like it is a ransom note, and so should you.

The stakes are bigger than a pub trivia win. One full comparison-rate point on a $600,000 loan over 25 years is worth tens of thousands of dollars. Run your shortlist through the mortgage affordability calculator before any lender gets your signature. Ten minutes of arithmetic beats a decade of overpayment.