The Comparison Rate Explained: Why the Advertised Rate Is Not the Whole Story

Home loan advertising in Australia loves a headline rate. But the number in the large font on the billboard or the top of the web page is rarely the rate that tells you what you will actually pay. That is what the comparison rate is designed to address, though it has its own limitations that are worth understanding.

What Is a Comparison Rate?

The comparison rate is a standardised figure that combines the interest rate with most of the fees and charges associated with a home loan, expressed as a single annual percentage figure. It is designed to give borrowers a more complete picture of the true cost of a loan than the headline interest rate alone.

Australian law requires lenders to display a comparison rate alongside their advertised interest rate whenever they advertise home loan products. The comparison rate calculation is standardised across all lenders, which makes it useful for side-by-side comparisons.

How Is the Comparison Rate Calculated?

The comparison rate calculation is based on a specific set of assumptions defined under the National Consumer Credit Protection regulations:

A loan amount of $150,000.

A loan term of 25 years.

A monthly repayment schedule.

The calculation includes the interest rate and most ongoing and upfront fees, such as application fees, monthly account-keeping fees and settlement fees.

By applying these standard assumptions to every loan, the comparison rate creates a standardised measure that accounts for the fee structure of each product alongside the rate.

Why the Comparison Rate Can Mislead

Here is where it gets important: the comparison rate is a useful starting point but a poor finishing point for your loan comparison.

The Reference Loan Is Small

The $150,000 reference amount used in the comparison rate calculation is far below the typical Australian home loan balance in 2026. The real impact of a fixed annual fee depends entirely on the actual loan size. On a $600,000 loan, a $400 annual fee is a much smaller percentage of the outstanding balance than on a $150,000 loan. This means the comparison rate can overstate the effective cost of fees for larger loans.

It Does Not Include All Costs

The comparison rate excludes certain costs that can be significant in practice:

Stamp duty and government charges, since these are not part of the loan product itself.

Offset account fees on some products.

LMI premiums, which can be tens of thousands of dollars.

Break costs for fixed rate loans.

Redraw fees on some products.

It Is Not Useful for Fixed Rate Loans Beyond the Fixed Term

For a fixed rate loan, the comparison rate often reverts to the standard variable rate after the fixed period ends, because that is the rate that applies for most of the 25-year reference period. A three-year fixed product at a low rate might have a comparison rate close to the revert variable rate, which tells you more about the revert rate than the fixed rate you will pay in the first three years.

How to Actually Compare Home Loans

Rather than relying on the comparison rate alone, a more complete comparison looks at:

The interest rate you will actually pay over the period you expect to hold the loan.

The fees specific to your loan size and usage pattern. A borrower who will use an offset account extensively has different fee priorities than one who will not.

The features that are important to you, such as offset account availability, redraw access, extra repayment limits and portability.

The lender's rate history and approach to passing on RBA cuts, since the revert variable rate after a fixed period is critically important.

Exit and refinancing costs, particularly if you are considering a fixed rate.

A Practical Approach

When comparing two loans side by side, use the comparison rate as an initial filter to eliminate products with obviously high fee structures, but then do your own calculation for your specific loan size and intended holding period.

For example, if Loan A has a 5.89 per cent rate and a 5.93 per cent comparison rate, and Loan B has a 5.85 per cent rate and a 6.05 per cent comparison rate, Loan B has a lower headline rate but a much higher comparison rate. The fee structure of Loan B is clearly heavier. On a $600,000 loan, the actual dollar impact of those fees may be greater or less than the comparison rate suggests, depending on the specific fees involved.

Use the Lenders and Compare tools at HomeLoanTools.com.au to assess loans side by side using your actual loan amount and circumstances, rather than the standardised reference amount used in comparison rates.

Summary

The comparison rate is a legally required, standardised tool for home loan comparisons that includes the interest rate and most fees in a single figure. It is more informative than the headline rate alone and useful for identifying products with high fee burdens. But it is calculated on a small reference loan amount and excludes important costs including LMI and break fees, which means it should be one input into your comparison, not the sole deciding factor.