Why the comparison rate isn’t a good comparison anymore

Adam Smith 10 July 2017 NEWS

Two house icons

The comparison rate is a handy tool, but counting on it could see you paying too much.

When you’re comparing home loans, the headline interest rate only tells part of the story. While a low interest rate can help you save serious money on your loan, a low-rate loan with hefty fees can eat up these savings in the long run.

This is where a comparison rate comes in. A comparison rate takes into account a home loan’s headline interest rate as well as the accompanying fees and expresses these as a single annual percentage. This is a much better tool for determining the true cost of a home loan.

There’s one major problem with comparison rates, though. The way they’re calculated is light-years away from what you’re likely to experience with your home loan.

In 2003, the Australian government made it mandatory for lenders to display comparison rates in their advertising. The idea was that displaying a uniformly calculated comparison rate would help consumers suss out the cost of the various loan products in the market.

A lot has changed since 2003.

As per the government’s guidelines, advertised comparison rates are all calculated on the same loan amount and term. The problem with this is that house prices have skyrocketed since 2003. Meanwhile, the way advertised comparison rates are calculated hasn’t changed.

Advertised comparison rates are based on a $150,000 loan over a 25-year term. With the median capital-city dwelling price now above $630,000, it’s highly unlikely your home loan is going to fit these criteria.

As we’ll find out below, changing the terms of a loan can have a significant impact on the loan’s comparison rate. Let’s look at three comparison rates, all pulled from advertising by real lenders.

Advertised comparison rates

  • Lender A Comparison Rate: 3.72%
  • Lender B Comparison Rate: 3.74%
  • Lender C Comparison Rate: 3.81%

We visited each lender’s website to find out how this comparison rate would change under more realistic borrowing circumstances. Fortunately, by law, lenders must provide you a document known as a Key Facts Sheet when you’re applying for a home loan. This document will give you the comparison rate for your specific borrowing amount and loan term. We entered our own info to generate Key Facts Sheets for each of the lenders.

To get a better picture of how different factors can influence a comparison rate, we generated Key Facts Sheets based upon the median Sydney dwelling value of $880,000 and a 10% deposit, leaving a loan amount of $792,000.

When we entered this information on each lender’s website, the results were surprising.

Actual comparison rates

  • Lender A Comparison Rate: 3.79%
  • Lender B Comparison Rate: 3.74%
  • Lender C Comparison Rate: 3.78%

After entering these figures for each lender, we found the lender with the cheapest advertised comparison rate actually became the most expensive. Meanwhile, the lender with the most expensive advertised comparison rate actually became cheaper under these criteria.

While the difference in the comparison rates above might seem insignificant, this small change can add up over the life of your loan. Over the course of a 30-year loan term, the total amount you would pay for Lender A’s product would be $1,328,418.80. The total amount for Lender B would be $1,318,818, and the total amount for Lender C would be $1,324,861.40.

The loan with the most expensive advertised comparison rate ends up being $3,557.40 less expensive than the loan with the least expensive advertised comparison rate. Meanwhile, the loan in between the two ends up a whopping $9,600.80 less expensive.

The reasons for this can vary. Some home loans incentivise higher borrowing amounts with lower interest rates. Others might incentivise lower loan-to-value ratios and charge higher rates to borrowers with a smaller deposit. A longer loan term can also add to the total amount of interest you pay.

With this in mind, it pays to generate your own Key Facts Sheet for your expected borrowing amount with lenders you’re considering. The advertised comparison rate can be a helpful tool when you’re considering home loans, but if you don’t take the time to dig a bit deeper, you could end up paying thousands more.

Ready to compare home loan rates? Check out today's rates in the table below

Rates last updated May 21st, 2018
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.69%
3.69%
$0
$0 p.a.
80%
Refinance to a UBank loan and you could get $1,000 in your USaver account (offer conditions apply). Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees.
3.64%
3.67%
$0
$0 p.a.
80%
A mortgage with a competitive variable rate, limited fees and plenty of flexibility.
3.69%
3.69%
$0
$0 p.a.
70%
Pay no application or ongoing fees and get a flexible loan with the ability to split up to 6 times.
3.64%
4.03%
$0
$395 p.a.
80%
New borrowers or refinancers from another lender get a discounted rate with this package loan.
3.64%
3.84%
$0
$0 p.a.
70%
Enjoy all the benefits of the Basic Home Loan and take advantage of an offset account.
3.68%
3.83%
$0
$10 monthly ($120 p.a.)
80%
Get a 100% offset account to save on interest charges, and pay no application fee.
3.69%
3.71%
$0
$0 p.a.
80%
A low rate variable home loan offer with no monthly fees or application fee charge.
3.69%
4.06%
$0
$349 p.a.
90%
Package your loan with other AMP products and save on rates and fees.
3.70%
4.13%
$0
$395 p.a.
90%
Package your loan with an eligible credit card for discounts on rates and fees, and get a 100% offset account.
3.49%
4.49%
$0
$395 p.a.
90%
Loans over $150k get a discount off an already low fixed rate. Available for NSW, Qld and ACT residents only.
3.79%
3.79%
$0
$0 p.a.
80%
Pay no application and ongoing fees with Macquarie Bank Basic Home Loan.
3.52%
3.53%
$0
$0 p.a.
80%
Go from application to approval in as little as 20 minutes with a variable rate loan from this innovative online lender. Add a 100% offset account for $10 a month.
3.79%
4.06%
$0
$20 monthly ($240 p.a.)
80%
Add a Platinum Rewards Mastercard with this package loan and you could earn 150,000 Bendigo reward points (Victoria only, terms and conditions apply).
3.69%
4.86%
$0
$395 p.a.
90%
Start your home buying journey with 2 years of fixed repayments and a reasonable rate from a big 4 bank. Available with a 10% deposit.
3.77%
3.81%
$200
$0 p.a.
95%
A simplified mortgage with a low interest rate and a redraw facility.
3.68%
3.69%
$0
$0 p.a.
95%
This variable rate loan offers flexible repayments and a redraw facility. Available with a 5% deposit.
3.69%
3.73%
$600
$0 p.a.
95%
Variable rate home loan from one of the big 4 banks. Available with just a 5% deposit.
3.58%
3.58%
$0
$0 p.a.
70%
A low interest rate home loan with no application or ongoing fees.
3.68%
3.69%
$0
$0 p.a.
90%
Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000.
3.87%
3.87%
$0
$10 monthly ($120 p.a.)
90%
Get Virgin Velocity Points at settlement, monthly and every three years, plus the option to make up to $10,000 a year in extra repayments.
3.69%
3.74%
$600
$0 p.a.
80%
A competitive variable rate for borrowers with a 20% deposit or more. Guarantor option available.
3.69%
4.04%
$0
$350 p.a.
95%
A competitive rate with no application fee.
3.69%
4.11%
$0
$395 p.a.
80%
Save on interest with a 100% offset account and save on other ME products with this package loan.
3.65%
3.66%
$0
$0 p.a.
80%
This special rate loan comes with no application or ongoing fees, and offers a flexible repayment schedule.
3.96%
3.98%
$350
$0 p.a.
90%
For a limited time, pay no application or settlement fees. You can also take advantage of a free redraw facility.
3.69%
3.94%
$0
$248 p.a.
70%
Get a sharp rate and a 100% offset account. Borrowers must have a 30% deposit.
3.62%
3.62%
$0
$0 p.a.
80%
Pay no application or ongoing fees and get access to a redraw facility and flexible repayment schedule. Refinance to a UBank loan and you could get $1,000 in your USaver account (offer conditions apply).
3.62%
3.62%
$0
$0 p.a.
95%
Free home and contents insurance for 1 year. Terms and conditions apply. QLD residents only.
3.73%
3.73%
$0
$0 p.a.
80%
Get a 100% offset account and pay no application or ongoing fees on this special variable rate for owner-occupiers.
3.79%
3.83%
$600
$0 p.a.
80%
A low interest rate loan with limited fees and a redraw facility. Principal and interest repayments only.
3.74%
3.74%
$0
$0 p.a.
110%
Pay no deposit or LMI and get a discounted rate with this family pledge loan. Requires a family member to act as guarantor. NSW, Qld and ACT only.
3.78%
3.78%
$0
$0 p.a.
80%
Pay no application or ongoing fees and get access to a free redraw facility with this innovative online lender.
3.89%
3.89%
$0
$0 p.a.
70%
Investors with a 30% deposit can get this low rate property investment loan.
3.90%
4.78%
$600
$0 p.a.
95%
A competitive fixed rate mortgage with split facilities and extra repayments. You can get this loan with a 5% deposit.
3.99%
5.17%
$600
$0 p.a.
90%
Competitive rates for fixed for 3 years with redraw facility.
3.74%
3.74%
$0
$0 p.a.
90%
New customers can get a discounted variable rate and a fee-free redraw facility. NSW, QLD and ACT residents only.
4.09%
4.12%
$0
$0 p.a.
95%
Buy a home with just a 5% deposit and get flexible repayment options and a redraw facility.
3.59%
4.14%
$395
$0 p.a.
80%
A one year fixed rate offer with no ongoing bank fees.
4.14%
4.14%
$0
$0 p.a.
80%
Investors pay no application or ongoing fees on this loan from an innovative online lender.
3.74%
4.01%
$395
$0 p.a.
80%
A competitive 3 year fixed rate with no ongoing bank fees.
3.88%
4.89%
$0
$395 p.a.
95%
Low deposit home loan. Enjoy flexible repayment options while paying limited fees.
3.99%
4.62%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
3.99%
4.86%
$0
$0 p.a.
80%
Access a fee-free 100% offset account and pay no application or ongoing fees.
3.89%
4.87%
$0
$0 p.a.
90%
Borrow up to 90% of the value of the property you're buying and pay no application or ongoing fees.
3.64%
3.64%
$0
$0 p.a.
70%
Get a discount for keeping your LVR at 70% or below with this innovative online lender.
3.85%
4.05%
$0
$350 p.a.
95%
This high LVR fixed rate loan allows you to borrow up to 95% of the value of the property you're buying.
4.09%
4.11%
$0
$0 p.a.
80%
This variable rate loan keeps the features simple and fees low. This loan is offered by a 100% online lender.
3.99%
3.99%
$0
$0 p.a.
80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required. Refinance to a UBank loan and you could get $1,000 in your USaver account (offer conditions apply).
3.69%
4.47%
$0
$395 p.a.
90%
A fixed rate loan with a 100% offset account and the option to make additional repayments. Loans over $150k receive a discounted rate. NSW, QLD and ACT residents only.
3.85%
4.82%
$600
$35 monthly ($420 p.a.)
90%
Make up to $10,000 in extra repayments per year and take advantage of a flexible repayment schedule.
3.79%
3.80%
$0
$0 p.a.
70%
Keep your LVR at 70% or below and enjoy a special discounted rate. Also, pay no application or ongoing fees.
3.99%
4.03%
$0
$0 p.a.
95%
Buy a home with just a 5% deposit and pay no application or ongoing fees.
3.89%
4.96%
$0
$395 p.a.
95%
Refinancers can get $1,500 cashback. Conditions apply. Package your home loan with a Qantas rewards earning Amplify credit card.
3.89%
4.97%
$0
$395 p.a.
95%
Get discounts on a range of Commonwealth Bank products and enjoy the option of fee-free extra repayments during the fixed term.
4.09%
3.79%
$0
$0 p.a.
70%
A competitive 3-year fixed rate loan with a high max insured LVR.
3.64%
3.65%
$0
$0 p.a.
95%
Family pledge option available. Get a special discount off Bank of Melbourne's basic variable rate.

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