The term ‘interest rates’ has migrated from the financial sector to become part of the modern vernacular. After all, most of us are affected by interest rates one way or another. But yet to make this migration is the term ‘comparison rate’. This is despite the two going hand in hand and comparison rates arguably being the more important of the two.
Comparison rates are particularly essential when you’re shopping around for a home loan, so let’s explore what exactly is being compared.
What is a comparison rate?
A comparison rate incorporates the interest rate of a home loan as well as certain fees and charges associated with it, expressed as a percentage. Lenders are legally required to disclose a comparison rate alongside a home loan’s interest rate to reflect the truer cost of the loan. The aim of the comparison rate is to help borrowers more easily compare home loans offered by different lenders.
Comparison rate background
The comparison rate, also known as the Average Annual Percentage Rate (AAPR), was mandated in Australia from 1 July 2003 under amendments to the Consumer Credit Code. This was done in a bid to force lenders to be more upfront with their fees and charges when advertising their home loan interest rates.
Essentially, some loans boasting low interest rates may not look as attractive when their comparison rates are declared. It also gives borrowers a base standard for comparing home loans.
Of course, not all home loans are created equal, so comparison rates are uniformly calculated on a theoretical loan amount of $150,000 with a loan term of 25 years. And herein lies the biggest weakness of a comparison rate. Data from CoreLogic in October 2024 found the median value of a dwelling in Australia was more than $800,000, so it’s highly likely most borrowers will be looking at loans of well over $150,000.
It’s also common that borrowers will opt for a loan term longer than 25 years, with 30 years being the most popular while some lenders even offer loans up to 40 years. So even if you encounter a competitive comparison rate, take it with a grain of salt until you apply your own circumstances to any calculation.
Interest rate vs comparison rate: what’s the difference?
Think of the interest rate as the small picture and the comparison rate as the big picture. The interest rate on a home loan, often referred to as the advertised or headline rate, is typically what the lender will advertise and what punters are most familiar with. It refers to the rate of interest you’ll be charged on the loan balance per year and affects how much your minimum monthly repayments will be.
In contrast, the comparison rate represents the overall cost per year of the loan, including the interest rate and most of the fees and charges that will be incurred over the course of the loan. (More on this below.)
How do you calculate the comparison rate?
Comparison rates are calculated using a formula set out by the Uniform Consumer Credit Code (UCCC). The calculation itself is quite complex, so it’s probably best you use our home loan comparison rate calculator where you simply plug in all you information and it does it all for you.
It’s worth noting the values set out below are for home loan comparison rates. Car loan comparison rates are different and are usually based on a $30,000 loan amount over a five-year term, while personal loans are usually based on $10,000 over three years.
The factors that go into the calculation for home loan comparison rates are:
Loan amount
As mentioned, this is a mandatory $150,000 amount.
Loan term
As above, the comparison rate sets the term at a mandatory 25 years.
Repayment frequency
This is typically monthly.
Interest rate
This will come down to the product the lender is offering.
Revert rate (if it’s a fixed-rate or intro-rate home loan)
The default interest rate the loan reverts to at the end of a fixed-rate or intro-rate term is also priced into the comparison rate. Given the default revert rates tend to be quite high, the comparison rates are often higher on fixed-rate loans than they are on variable-rate loans. But in reality, home loan customers coming to the end of their fixed-rate term can often negotiate a better rate for their loan to revert to than their lender’s default revert rate.
Fees
Some of these home loan fees may not apply based on the lender and product:
-
Monthly account fee
-
Annual fee
-
Establishment fee
-
Valuation fee
-
Mortgage documentation fee
-
Settlement fee
What doesn’t the comparison rate cover?
The comparison rate isn’t foolproof when it comes to comparing home loans – it has its pitfalls. There are some costs that aren’t included in the calculations, despite them likely affecting your mortgage costs. These include:
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Government stamp duty
-
Conveyancing fees
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Fee waivers
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Deferred establishment fees
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Any optional costs such as early repayment and redraw fees
-
Features like offset accounts or extra repayments
Essentially, the comparison rate doesn’t include any add-on costs or those you may incur separately from the home loan, such as stamp duty. These costs are worth factoring into your decision to purchase a home since they can end up being significant.
Why is the comparison rate important?
The average Australian doesn’t have a great wealth of knowledge when it comes to banking or home loans. Most of us also don’t have the time to carefully peruse the terms and conditions of a loan product to be sure there are no sneaky fees hidden on page 36 of a home loan document, written in size 6 italic font.
Comparison rates strive to give borrowers a full deck to play with when it comes to home loans, rather than a couple of jokers the lender may deal you. The information that comparison rates can provide in simple terms is crucial, as even a marginal difference in the interest rate on your loan can cost tens of thousands of dollars.
As you can see in the overly simplified table below, home loan A has a better interest rate than home loan B.
However, once the various fees and charges have been accounted for in the comparison rate, home loan B is a far cheaper product than home loan A.
|
Interest rate |
Fees & charges |
Comparison rate |
|
|---|---|---|---|
|
Home loan A |
6.35% |
1.00% |
7.35% |
|
Home loan B |
6.50% |
0.50% |
7.00% |
Where do you find the comparison rate?
It’s mandatory for lenders to display the comparison rate when advertising their loan products. (This includes personal loans and car loans, as well as home loans.)
You’ll usually find the comparison rate right next to the headline rate, so for example “6.00% p.a. variable rate (6.50% p.a. comparison rate)”.
All lenders must also provide a key facts sheet on the product they’re offering, which must specify the comparison rate, interest rate, and the total amount to be repaid over the life of the loan.
Case study
Here’s a super simplified hypothetical situation to show you the application of comparison rates in real-world terms:
Cam Parison has found a well-priced apartment for sale at $600,000. He wants to buy it and has saved up $120,000 for a deposit and is looking to borrow $480,000 over 30 years. He’s found two products he likes from lenders ‘Connbank’ and ‘Not A Bank’,
However, the lenders are engaging in dodgy practices and not displaying the relevant comparison rates, so Cam decides to calculate them himself.
‘Connbank’ is offering a three-year fixed-rate mortgage. The fixed rate is 6.00% p.a. which switches to an ongoing variable rate of 6.50% p.a. at the end of the three-year fixed period. There is a $40 monthly fee, a $500 upfront fee, and $300 discharge fee.
Cam calculates that the comparison rate will be 6.55% p.a.
‘Not A Bank’ is offering a variable-rate mortgage with an interest rate of 6.25% p.a. The only fee is a $50 monthly fee. Cam calculates that the comparison rate will then be 6.42% p.a.
Borrowing from ‘Not A Bank’ over ‘Connbank’ would save Cam around $19,238 over the course of the loan.
Savings.com.au’s two cents
Although we’ve championed the comparison rate as a home loan hero, there are many other things to consider when choosing which loan product is right for you.
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Always consider the type of loan, such as whether it’s a fixed or variable rate or if it has an introductory rate
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Check what types of features it has, like offset accounts and split loan facilities
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Also check the conditions associated with it, such as whether there’s a cap on extra repayments
The table below can be a good place to start. It features some of the lowest interest rates on the market. Be sure to check the comparison rate and the requisite fine print that can accompany some home loan products.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 Star Customer Ratings |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% | Apply in minutes |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure | ||||||||||
5.69% p.a. | 6.16% p.a. | $2,899 | Principal & Interest | Fixed | $0 | $530 | 90% |
| Promoted | Disclosure |
First published on February 2021
Image by Raquel Martinez on Unsplash
Original article published February 2021. Last updated 13 November 2024.
Disclaimers
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
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