In short: A comparison rate is the interest rate plus most fees, expressed as a single percentage, calculated by law on a $150,000 loan over 25 years. It is useful for spotting fee-heavy loans, but because most Melbourne home loans are far larger than $150,000, it overstates the impact of fixed fees and ignores the value of an offset account, redraw, rate discounts after a fixed period and the actual size of your loan.
Key takeaways
- The comparison rate is calculated on a $150,000 loan over 25 years, principal and interest, and includes most upfront and ongoing fees.
- A $395 annual fee is 0.26% of $150,000 but only 0.06% of $700,000, so fixed fees look far worse in a comparison rate than they are on a real Melbourne loan.
- It excludes government charges, event fees such as early repayment costs, and any benefit from an offset account or redraw.
- For fixed loans it assumes the revert rate applies for the rest of the term, which can make a good short fix look expensive.
- Use it to rule out fee-heavy loans, then compare real dollar costs on your actual loan size and features.
Every home loan advertisement in Australia carries two numbers: the interest rate and, in smaller type, the comparison rate. Borrowers have been told for years to trust the second one. It is a fair tool for its purpose, and its purpose is narrower than most people think. Here is exactly how it works and where it leads you astray.
How the comparison rate is calculated
The formula is set by regulation. The lender takes the loan's interest rate, adds known upfront fees (application, valuation, settlement, documentation) and ongoing fees (monthly or annual account fees, package fees), and works out the single rate that would produce the same total cost over 25 years on a $150,000 loan. The result is the comparison rate. Moneysmart explains the regulation in detail, and our comparison rate guide has more on the mechanics.
What it includes
- Interest rate, including the revert rate after any fixed or introductory period
- Establishment, application and valuation fees
- Ongoing account, service and package fees
- Discharge fees the lender charges at the end
What it excludes
- Government fees such as stamp duty and registration
- Fees triggered by events: redraw fees, early repayment or break costs, late payment fees
- Lenders mortgage insurance
- The interest saving from an offset account
- Any rate discount you negotiate personally
- Fee waivers that depend on your loan size or package
Worked example: two loans, one wrong answer
For illustration, compare two variable loans:
| Loan A | Loan B | |
|---|---|---|
| Interest rate | 5.90% p.a. | 6.05% p.a. |
| Annual package fee | $395 | Nil |
| Upfront fees | $600 | Nil |
| 100% offset account | Yes | No |
| Comparison rate (on $150,000 over 25 years) | About 6.30% p.a. | 6.05% p.a. |
By the comparison rate, Loan B wins by a quarter of a percentage point. Now put a real Melbourne loan through both.
| Borrower in Craigieburn with a $700,000 loan | Loan A | Loan B |
|---|---|---|
| Annual interest at the headline rate | $41,300 | $42,350 |
| Annual package fee | $395 | Nil |
| Total year-one cost before offset | $41,695 | $42,350 |
| Offset benefit with $30,000 average balance at 5.90% | Saves $1,770 | Nil |
| Total year-one cost with offset | $39,925 | $42,350 |
Loan A is cheaper by $655 a year before the offset and by about $2,425 a year with it. Over a decade that is well over $20,000, and the comparison rate pointed the other way. Test your own figures with the loan comparison calculator and the offset calculator.
Why the gap appears
The fixed fee is spread over a $150,000 balance in the comparison rate but over $700,000 in reality. And the offset, which is the single most valuable feature for most owner-occupiers, is worth exactly zero in the formula because it depends on how you use it.
The fixed-rate distortion
Comparison rates on fixed loans assume the fixed rate applies for the fixed term and the lender's standard revert rate applies for the remaining years to 25. If a lender offers 5.49% p.a. fixed for two years with a revert rate of 6.79% p.a., the comparison rate might sit above 6.60% p.a., which looks terrible against a 5.99% p.a. variable loan.
In practice almost no one stays on the revert rate for 23 years. Most refinance, renegotiate or re-fix at the end of the term. The comparison rate is measuring a scenario you will not live in. Our fixed vs variable guide explains how to weigh a fixed term on its own merits, and our breaking a fixed rate guide covers the break costs the comparison rate also ignores.
When the comparison rate is genuinely useful
- Spotting a low headline rate propped up by fees. A loan advertising 5.79% p.a. with a comparison rate of 6.45% p.a. is telling you something.
- Comparing similar loans of similar size. Two basic variable loans with no offset and modest fees compare fairly.
- Small loans. On a $200,000 loan the $150,000 basis is close to reality and the fee weighting is about right.
- Introductory rates. A honeymoon rate that reverts high shows up clearly.
Beyond that, it is a screening tool, not a decision tool.
How to compare loans properly
- Start with your actual loan size and expected term. A couple buying in Mernda with a $620,000 loan should compare on $620,000.
- Add every fee in dollars over your realistic holding period, say five years, rather than 25.
- Value the offset on the balance you will actually keep there.
- For fixed loans, compare the fixed period plus a realistic refinance, not the revert rate to year 25.
- Ask about discounts: many lenders discount below the advertised rate for loan size, LVR or package, and none of that appears in the comparison rate.
- Check the RBA cash rate direction and your own plans: a loan that is cheapest today may not be cheapest after a rate move if its discount is thinner.
This is the work a broker does across a panel of lenders, and it is the reason a broker's recommendation often differs from the loan with the lowest comparison rate. Our mortgage broker vs bank guide explains how the comparison is built, and if your existing loan fails this test our refinancing service can move it. Brokers are also bound by a Best Interests Duty, which is about your real cost, not an advertised figure; see our best interests duty page.
Frequently asked questions
Is a lower comparison rate always the cheaper loan?
No. It is the cheaper loan for a $150,000 borrower over 25 years with no offset and no discounts. For a $700,000 Melbourne loan with an offset, a loan with a higher comparison rate can easily cost thousands less a year. Compare in dollars on your own loan size and features.
Why is the comparison rate sometimes lower than the interest rate?
It should not be lower on a standard loan, but it can appear lower on a fixed loan where the revert rate after the fixed period is below the fixed rate, or where a lender has waived fees. If you see it, read the revert rate and fee terms carefully; the formula is telling you something about the years after the fixed term.
Do brokers have to show comparison rates?
Any advertisement of an interest rate for a consumer credit product must include a comparison rate, whether it comes from a lender or a broker. Brokers also owe a Best Interests Duty under the National Consumer Credit Protection Act, which means recommending the loan that suits you, not the one with the best-looking number.
How do I compare a loan with an offset against one without?
Estimate the average balance you will keep in the offset, multiply it by the loan's interest rate, and treat that as a saving. On $30,000 at 5.90% p.a. that is $1,770 a year. Then compare the total cost including fees. Be honest about the balance; an offset you never fund is worth nothing.
Talk to GNT Finance
Gorakh Timilsina compares loans on your real loan size, real features and real plans, not on a regulatory formula built for $150,000. There is no cost to you for our home-loan service in most cases. Book a free consultation or call 0426 403 703.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.