Understanding Comparison Rates and True Loan Costs
Learn what comparison rates are, why they matter, and how to use them to compare home loans effectively.
The advertised interest rate tells only part of a loan's story. Comparison rates provide a more complete picture by incorporating fees and charges into a single percentage figure. However, comparison rates have limitations and shouldn't be your only decision criteria. This guide explains how to interpret and use them effectively.
What is a Comparison Rate?
A comparison rate combines the interest rate with most fees and charges into one figure, making it easier to compare loans. For example, a loan might advertise 6.00% interest but have a 6.30% comparison rate once application fees, monthly fees, and other charges are included. The higher the comparison rate above the interest rate, the more fees that loan carries.
What's Included in Comparison Rates
Comparison rates include: the interest rate, application or establishment fees, monthly or annual account-keeping fees, and loan service fees. They're calculated over a standard $150,000 loan for 25 years. This standardization allows apples-to-apples comparisons between different lenders' products.
What's NOT Included
Comparison rates exclude: government charges (stamp duty), lenders mortgage insurance, redraw fees, early repayment fees, break costs for fixed loans, ongoing package fees, and charges for optional features like offset accounts. These exclusions mean the comparison rate doesn't capture the complete cost—it's a guide, not the full picture.
Limitations of Comparison Rates
The $150,000/25-year standard doesn't match most borrowers' situations. If you're borrowing $600,000 for 30 years, the comparison rate calculated for $150,000/25 years may misrepresent relative costs. Fees become proportionally smaller on larger loans. Additionally, if you plan to pay off your loan in 10 years, upfront fees matter less than ongoing monthly fees.
How to Use Comparison Rates Effectively
Use comparison rates as an initial filter to identify loans worth investigating further. A 6.00% rate with 6.50% comparison rate signals high fees—understand what you're paying for. Compare similar loan types (variable to variable, fixed to fixed). Then dive deeper: request a full fee schedule, calculate costs based on your actual loan amount and expected term, and consider features beyond rates.
Features vs. Rates
A loan with a higher comparison rate might still be better if it offers valuable features: offset account (saves interest on savings), unlimited extra repayments (pay off faster), redraw facility (access extra payments), no ongoing fees, or portability (transfer to new property). Calculate whether these features' savings outweigh the higher comparison rate.
Getting the Full Picture
Beyond comparison rates, assess: total fees over your expected ownership period, interest saved from offset accounts, flexibility for extra repayments, ability to refinance without penalties, and reputation for customer service. Use online calculators to model total costs with your loan amount, deposit, and repayment strategy over your expected timeframe.
Key Takeaways
Comparison rates are a useful starting point for comparing loans but shouldn't be your only decision criterion. Look beyond the rate to understand fees, features, and flexibility. A slightly higher comparison rate might deliver better value if it includes offset accounts, no monthly fees, or unlimited extra repayments. Discuss your situation with a mortgage broker to identify loans that truly suit your needs and strategy.
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