Australian law requires lenders to display a comparison rate alongside the advertised interest rate for any home loan. Understanding what this number means — and where it falls short — is essential to comparing mortgage offers accurately.
The comparison rate is a single percentage figure that incorporates both the interest rate and the majority of fees and charges associated with a loan. It is calculated on a standardised basis set by the National Consumer Credit Protection Act (NCCP): a $150,000 loan over 25 years, with specific assumptions about fee types. The result is expressed as an annual percentage rate.
For example, a loan advertised at 5.89% might carry a $395 annual package fee. The comparison rate might be 6.12% — the additional 0.23% represents the effective annual cost of that fee spread over the loan's assumed life.
Before comparison rate requirements were introduced, lenders competed heavily on advertised rates while loading loans with fees. A loan at 6.5% with $1,500 in annual fees might be more expensive than a loan at 6.7% with no fees, but the lower advertised rate attracted borrowers. The comparison rate was introduced to create a level playing field by forcing a like-for-like measure of true loan cost.
The comparison rate includes:
This is where the comparison rate falls short. It excludes:
The standardised base is misleading for large loans: The comparison rate is calculated on $150,000 over 25 years — a loan size that few Australians actually take out. A $395 annual fee is a larger proportion of interest on a $150,000 loan than on a $600,000 loan. If your actual loan is $600,000, the comparison rate overstates the relative impact of fixed fees. Always calculate the actual dollar cost of fees on your real loan amount.
The comparison rate is most useful as a first-pass filter when comparing similar loan products from different lenders. A loan with a low advertised rate but a much higher comparison rate signals significant fees — investigate those fees specifically.
For a more accurate picture, calculate the total cost over your actual expected loan term (not 25 years) on your actual loan amount:
For fixed rate loans, the comparison rate is calculated as if the fixed rate applies for the full loan term — it does not account for the revert rate after the fixed period ends. This can make fixed rate loans look cheaper in comparison rate terms than they will actually be over the full loan life. When comparing fixed loans, always check the revert rate (the rate the loan reverts to after the fixed term).
Every fee you will encounter on a home loan — from application to exit.
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