Home loan comparison rates explained

A home loan comparison rate is an interest rate that always accompanies a lender’s advertised interest rate. The comparison rate represents a new loan’s ‘true cost’ (i.e. the ongoing cost of the loan after its regular fees and charges are taken into account).

Lenders are legally required to provide a comparison rate alongside their advertised interest rates, as they allow consumers to compare one against the other and decide for themselves whether or not the home loan offers good value.

For example, one home loan might offer a lower interest rate but charge much more in fees, which will subsequently be reflected in a higher comparison rate. And conversely, a home loan could have a comparison rate lower than its advertised interest rate, which would generally indicate that its fees and charges are on the low end of the scale.

Comparison rates are calculated based on a home loan’s interest rates, fees and charges, using a standardised formula that’s set out in the National Credit Code and used by all financial institutions and mortgage providers in Australia.

In essence, the home loan comparison rate helps you to identify the true cost of a loan and assists in comparing different loan options offered by various lenders – something we can help with.

A standard home loan comparison rate will generally take the following into account:

• Your advertised home loan interest rate. Expressed on a per-annum (p.a.) basis for all home loan types (whether a variable-rate or fixed-rate home loan), and regardless of your repayment type (i.e., whether you’re making principal & interest repayments or interest-only repayments).
• The standard variable rate. If you’re on a fixed-rate home loan, the comparison rate will also factor in the rate your loan reverts to at the end of the fixed-rate.
• Upfront fees. These can include home loan application fees, pre-approval fees, establishment fees, valuation fees (the cost for assessing your home’s value), documentation fees and settlement fees.
• Ongoing fees. Like monthly account fees, annual fees and package fees.
• Repayment and term options. The range of options on offer when it comes to repayment frequency (i.e., weekly vs fortnightly vs monthly repayments) and the loan term can affect a comparison rate.

This list isn’t exhaustive, but it gives you a good idea of the comprehensiveness of the comparison rate calculations carried out by lenders.

While the comparison rate can help you understand the estimated real cost of your home loan versus what you’ll be paying for it, it doesn’t include everything and, as we’ll explain below, it isn’t a perfect guide to how much a loan might cost you.

The comparison rate doesn’t include things like redraw facility fees, early repayment fees, additional repayment fees and other charges (such as break fees or missed repayment fees), as these aren’t inherent costs of the product. They’re fees you’d incur for certain actions, and don’t count towards the regular operating costs of the loan. Sign-up incentives and special offers such as cashback deals aren’t factored in either.

A comparison rate also won’t account for other situational charges like fee waivers or external government charges like stamp duty and mortgage registration fees. For the most part, these are home-buying costs, not home loan costs. The other potentially significant factors that a comparison rate won‘t take into account are your loan to value ratio (LVR) and lenders mortgage insurance (LMI). If your LVR is higher than 80%, you may have to pay LMI, which in turn would drive up the cost of your home loan.

This is why it’s important to read the relevant key fact sheet for detailed information about the fees and charges of the home loan you’re considering.

The comparison rate on a variable rate home loan must be accurate at the time it is published and will fluctuate in accordance with the interest rates being offered by the financial institution. If the RBA adjusts the cash rate, your lender may decide to change the variable rate loan’s interest rate, and your home loan may end up with a different comparison rate.

Under the National Credit Code, credit providers are required to include a comparison rate “when they advertise fixed-term credit which is for, or mainly for, personal domestic or household purposes”.²

This means anytime you see an interest rate advertised for a car loan or a personal loan, you’ll also see a comparison rate.

Financial institutions are legally required to display the comparison rate directly next to individual advertised rates for any home loan product, to help customers better understand the true cost of the home loan.

So, whether you’re seeing a home loan interest rate on TV, the internet or out and about on a billboard, it’ll have a comparison rate next to it, whether it’s a no-frills owner-occupier home loan for a new home or an investment loan for an investment property.

A home loan comparison rate can help you estimate the true cost of your home loan so you can make a fairer and more informed comparison between products. Comparison rates make it easier to compare different products from different lenders based on what might suit your financial situation.

For example, some lenders might advertise a low interest rate but make up for it by driving up their fees and charges. This would make your home loan more expensive overall, even if you’re paying a relatively smaller amount of interest, and subsequently be reflected in a higher comparison rate.

The standard interest rate is known as the advertised interest rate and is set by the lender itself. There are a number of factors that determine the interest rate, including:

• The Reserve Bank of Australia (RBA) cash rate
• The Bank Bill Swap Rate (BBSW), the rate at which funds are exchanged between banks in the wholesale market
• The home loan market (what their competitors are doing)
• Government regulation.

Home loan comparison rates are calculated using a standard formula set out in the National Credit Code. The calculation is based on a $150,000 loan over a 25-year loan term with monthly, principal and interest repayments, and the fees and charges that must be paid under the conditions of the loan as opposed to fees and charges that you could pay over the life of the loan.

The loan amount used in the calculations ($150,000) means the comparison rate should be used as a guide only, as most property values and home loans these days are much larger. For example, as of February 2023, the average owner-occupied mortgage in Australia was $586,000, according to the Australian Bureau of Statistics (ABS).¹ You may also opt for a 30-year term, as that’s the longest term offered by most lenders; the longer your loan term is, the lower your regular home loan repayments will be.

It’s important to remember that the comparison rate is calculated using a standard formula and is not calculated on your own loan scenario. This means that while comparing the comparison rate against the advertised interest rate can give you a better idea of the home loan’s inherent value proposition, that value offering might change once the calculations are scaled up using a more realistic loan balance (i.e., one based on the value of the property you’re buying) and term.

A comparison rate might be lower than the advertised interest rate if you’re looking at a fixed rate home loan which reverts to a cheaper variable rate at the conclusion of the fixed rate period.

Because the comparison rate is calculated based on what you’d pay over the life of the loan, being on a (potentially) lower variable rate for most of the loan term could put enough downwards pressure on the comparison rate to make it cheaper than the loan’s initial fixed interest rate.

There is no one ‘best’ comparison rate, as the best comparison rate for you will depend largely on your personal and financial circumstances, your borrowing power and your needs and objectives, as well as the loan you’re considering. That said, while you may want to get a low rate for your home loan, it’s also important to consider other things like the loan features, fees and charges. A cheap, basic home loan with no features will likely be more affordable than a more feature-rich product, but that doesn’t mean it’ll automatically offer better value or be a good choice for you.