What a comparison rate actually tells you

Every home loan advertised in Australia has to show a second number next to the headline rate. It is usually smaller, usually higher, and usually ignored. That second number is the comparison rate, and it is the single most useful figure on a rate table.

Why it exists

A lender can advertise a very low interest rate and claw the difference back in fees. A $10 monthly account fee is $3,600 over a 30-year loan. A $795 application fee is real money on day one. If you only compare headline rates, the loan with the lowest number can quietly be the most expensive one on the table.

The comparison rate was introduced to stop that. It rolls the interest rate together with most of the compulsory fees and expresses the whole cost as a single percentage, so two loans can be lined up honestly.

What goes into it

The comparison rate includes:

• the interest rate
• application and establishment fees
• ongoing account or service fees
• valuation and settlement fees charged by the lender
• discharge fees at the end of the loan

What it leaves out

This is the part that catches people. The comparison rate does not include:

• government charges, like mortgage registration and transfer fees
• Lenders Mortgage Insurance, which can run to tens of thousands of dollars on a small deposit
• fees that only some borrowers pay — redraw fees, break costs on a fixed loan, late payment fees
• any cashback or rebate the lender is offering

So a loan with a competitive comparison rate and a $4,000 LMI bill attached can still be the wrong choice.

The $150,000 problem

Here is the catch nobody mentions. By convention, every comparison rate in Australia is calculated on a $150,000 loan over 25 years. That standard makes loans comparable with each other, but it means the figure almost never describes your actual loan.

Fixed fees get diluted as the loan gets bigger. Consider a $395 application fee:

Loan size	Effect of a $395 fee on the comparison rate
$150,000	roughly 0.04%
$650,000	roughly 0.01%
$1,200,000	under 0.01%

On a $900,000 loan, a difference of 0.15% in comparison rate that comes entirely from fees is far less significant than the same gap on a $200,000 loan. The reverse is also true: on a small loan, fees dominate, and the comparison rate is doing real work.

The practical rule: use the comparison rate to sort the field, then check the actual fees against your actual loan size before you choose.

Fixed loans distort it further

A comparison rate on a two-year fixed loan assumes the loan reverts to the lender’s standard variable rate for the remaining 23 years. That revert rate is often well above the market. A fixed loan can therefore show an ugly comparison rate that says more about the lender’s revert rate than about the two years you actually plan to be fixed for.

If you intend to refinance or renegotiate when the fixed term ends — and most people do — the comparison rate on a fixed product overstates your cost.

How to use it properly

1. Sort by comparison rate first. It is the closest thing to an apples-to-apples ranking, and it stops a fee-heavy loan from looking cheap.
2. Then adjust for your loan size. Big loan? Weight the interest rate more heavily. Small loan? Fees matter more, so trust the comparison rate.
3. Then price the things it excludes. Ask for a written figure for LMI, government charges, and break costs.
4. Then check the features. An offset account that saves you $200 a month in interest beats a 0.05% rate difference.

The comparison rate is a filter, not a verdict. It narrows twenty loans to five. Choosing between those five is a question about your loan, not about the average one.

Try it on your own numbers

Put your loan size and both rates into the repayment calculator and look at the total interest line rather than the monthly figure. On a long loan, a rate gap that looks trivial per month turns into a very large number over thirty years — and that is the number worth arguing about.