Comparison rates: What does this rate actually mean? | Finder

What is a comparison rate?

A comparison rate can help you work out the true cost of your mortgage, but they're not always helpful. Let's dig deeper into how comparison rates work and how you can calculate your own comparison rate.

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A comparison rate is a rate that all lenders by law must display next to their advertised interest rates. It's a rate that takes into account some of the fees and charges of a home loan, and it's designed to give you a more accurate representation of a loan's true cost once all of the fees, charges and costs are taken into account.

Compare mortgages by interest and comparison rates

Comparison rates were made mandatory in an attempt to stop lenders from advertising very low interest rates that lured unsuspecting borrowers into loans that actually cost them far more in the long run. For instance, a lender might have advertised a low mortgage interest rate of 2.5%, but then charged $20 per month in account keeping fees and an annual $400 loan package fee. Once these expenses are added in, the loan could be more expensive than a different bank that was charging 2.6%, but with no fees.

A comparison rate on a home loan is legally mandated to be calculated based on:

  • An example loan of $150,000
  • A loan period of 25 years
  • A principal and interest loan

Back when comparison rates were introduced in July 2003, these figures made much more sense. Today, the average loan size is much more than $150,000: the latest stats put the current average loan size closer to $500,000.

The average loan term for the majority of borrowers is also 30 years, not 25 years.

It's important to be aware of this when looking at the comparison rate, because if your loan is more than $150,000, the comparison rate won't be a true reflection of the actual costs of your loan. We'll explain more in a moment – but first, what is the difference between the interest rate and the comparison rate?

What's the difference between the interest rate and comparison rate?

The interest rate is the percentage of interest that you will be charged on your loan. If your loan is $500,000 and the interest rate is 2.75%, you will be charged interest of around $13,750 in the first year of having the loan.

However, the interest rate you are charged doesn't consider all of your costs. There are other costs that your lender may charge, such as:

  • Account keeping fees
  • Annual package fees
  • Loan switch fees (when you move between variable and fixed rates)
  • Rate lock fees (when you are first obtaining a loan)
  • Government fees and charges

The comparison rate is a percentage amount that is calculated by adding together the interest rate, plus any additional fees and charges that may apply to the loan. The total figure is then converted into a percentage rate to highlight the true cost of the loan.

Lenders are unable to hide any fees, charges or other costs, as these are reflected in the overall comparison rate.

How do you calculate the comparison rate?

If the comparison rate you're given isn't reflective of your loan amount or your preferred loan term, it is possible to calculate this yourself. The comparison rates are actually calculated using a formula that is governed by the Uniform Consumer Credit Code (UCCC).

The calculation is not simple, so you may find that using a good comparison rate calculator, such as our calculator below, will make this easier for you. Before you begin, you will need the following information:

  • Loan amount
  • Loan term
  • Repayment frequency
  • Interest rate
  • Monthly account fee (if any)
  • Annual fee (if any)
  • Establishment fee (if any)
  • Valuation fee (if any)
  • Mortgage documentation fee (if any)
  • Settlement fee

When you have all this information, you're able to enter it into the comparison rate calculator and reach a percentage rate that more accurately displays the real cost of a home loan.

How do lenders calculate the comparison rate?

The comparison rate is calculated using a formula that takes into account a number of items. These include:

Interest rate

The actual interest rate charged by the bank for your home loan is the major factor in calculating the comparison rate.

Fees and charges

Many lenders charge a monthly account fee for their mortgage accounts. Some might charge an annual package fee. Some may also charge an establishment fee, valuation fee, mortgage documentation fee and settlement fee. These charges need to be taken into account when calculating the comparison rate, as they do affect the overall cost of the loan.

Loan term

When it comes to calculating comparison rates, a longer loan term will mean a higher comparison rate. If you see a comparison rate calculated over 25 years, ask to have it reworked to reflect a 30-year term, if this is how long you intend your mortgage to be set for.

Loan amount

The actual loan amount will also be a factor in calculating the comparison rate. Some banks actually offer discounted interest rates on larger loan amounts, so the comparison amount may actually be lower for a bigger loan amount.

Payment frequency

The interest on your mortgage is calculated on the outstanding balance every day. This means that paying your repayments more frequently will actually reduce the balance on a more regular basis, which can reduce the overall comparison rate.

What isn't included in the comparison rate?

Multiple factors are taken into consideration in an effort to reveal the true cost of a loan and arrive at a comparison rate. Unfortunately, there are some costs that won't be included in the calculations, even though they are costs that can affect how much your mortgage costs overall. These include:

  • Break costs or early termination fees
  • Deferred establishment fees
  • Redraw fees

How important is the comparison rate?

The example comparison rates on home loans are only guidelines for possible costs. The actual cost of your loan depends on many factors and with legal comparison rates based on an amount of $150,000, there's an argument that they're not very helpful.

Data updated regularly
$
years
Name Product Interest Rate (p.a.) Comp. Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
HSBC Fixed Rate Home Loan
1.88%
2.86%
$0
$0 p.a.
80%
$546.6
$3,288 refinance cashback offer
Lock in a low fixed rate for 2 years and buy your home with a 20% deposit. Eligible refinancers borrowing $250,000 or more can get a $3,288 cashback. Terms and conditions apply.
Westpac Flexi First Option Home Loan
2.29%
2.72%
$0
$8 monthly ($96 p.a.)
95%
$577.55
Up to $3,000 refinance cashback.
A flexible and competitive variable rate loan. Eligible borrowers refinancing $250,000 or more can get $2,000 cashback per property plus a bonus $1,000 for their first application. Other conditions apply.
Suncorp Back to Basics Home Loan
2.44%
2.45%
$0
$0 p.a.
80%
$589.12
A competitive variable interest rate loan with low fees. The establishment fee is waived if you borrow $150,000 or more.
Macquarie Bank Basic Home Loan
2.49%
2.49%
$0
$0 p.a.
60%
$593.01
A competitive variable rate home loan for owner-occupiers. Requires a 40% deposit.
UBank UHomeLoan Variable Rate
2.34%
2.34%
$0
$0 p.a.
80%
$581.39
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees.
Athena Variable Home  Loan
2.19%
2.19%
$0
$0 p.a.
60%
$569.91
Owner occupiers with 40% deposits or equity can get this competitive variable rate loan. No upfront or ongoing fees.
UBank UHomeLoan Fixed
1.75%
2.22%
$0
$0 p.a.
80%
$537
This very low fixed rate is only available until 29 April 2021. Other conditions apply. A competitive fixed rate loan with no ongoing fees. Requires a 20% deposit
loans.com.au Smart Booster Discount Variable Home Loan
1.99%
2.47%
$0
$0 p.a.
80%
$554.81
Home buyers can get a very low discounted variable rate for the first year. This loan has a revert rate of 2.48%. Requires a 20% deposit. Add an offset account for an additional 0.10% on your interest rate.
homeloans.com.au Low Rate Home Loan with Offset
2.59%
2.42%
$0
$0 p.a.
60%
$600.83
Suncorp Home Package Plus Fixed
1.89%
2.85%
$0
$0 p.a.
80%
$547.35
Lock in a low fixed rate loan for two years and get the annual package fee waived in the first year. Available for borrowers with 20% deposits.
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Logo for Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)
Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)

Up to $3,000 refinance cashback. A flexible and competitive variable rate loan. Eligible borrowers refinancing $250,000 or more can get $2,000 cashback per property plus a bonus $1,000 for their first application. Other conditions apply.

Logo for St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)
St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)

Up to $4,000 refinance cashback With this competitive variable rate loan from St.George, refinancers borrowing $250,000+ can get up to $4,000 cashback and borrow up to 80% of the property's value (terms, conditions & exclusions apply).

Logo for Athena Liberate Home Loan - 70% to 80% LVR Owner Occupier, P&I
Athena Liberate Home Loan - 70% to 80% LVR Owner Occupier, P&I

A competitive variable rate mortgage for owner occupiers $0 application and $0 ongoing fees. This interest rate falls over time as you pay off the loan.

Logo for Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR ≤ 80% (Owner Occupier, P&I)
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR ≤ 80% (Owner Occupier, P&I)

Get a competitive variable interest rate with no application fee or ongoing fees.

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