What is a Comparison Rate? Everything You Need to Know with Calculations & Examples

What is a comparison rate?

A comparison rate is the true cost of a home loan. The comparison rate calculation considers the interest payments (based on the advertised interest rate) and includes any additional fees and charges that are included with the loan. The calculation results an interest rate (expressed as an annual percentage rate) that is slightly higher than the advertised rate, as it includes the ongoing fees and charges, which can help you estimate how much the loan could cost per year. By law, lenders are required to show customers a comparison rate alongside the advertised interest rate.

How is the comparison rate calculated?

The comparison rate calculation is based on a $150,000 loan over a 25-year loan term. The comparison rate formula takes into account the following factors:

• Interest rate of the loan
• Fees and charges
• Repayment frequency

What kind of fees are included in the comparison rate calculation?
The comparison rate calculation takes into consideration the fees and charges applicable to the loan, which can include the following types of fees:

Upfront fees

• Application fee
• Valuation fee
• Documentation preparation fee
• Preapproval fee
• Settlement fee
• Legal fee

Ongoing fees

• Annual package fee
• Monthly account fee
• Admin fees

Discharge fees

• Discharge fee
• Documentation preparation fee
• Settlement fee

What is the difference between the interest rate and the comparison rate?

Wondering what the difference between the interest rate and comparison rate is? Here’s a quick overview:

• Interest rate: reflects how much interest you will be charged per year on the balance of your loan. This affects your monthly repayments.
• Comparison rate: combines the interest rate plus most fees and charges that come with the loan. This is designed to help you identify the cost of the loan more accurately and make it easier to compare products.

Why should the comparison rate matter to you?

The comparison rate is helpful because it gives indication of how much the loan will truly cost you, and ultimately, whether it is good value for money once the fees are taken into account. By law, all lenders include the comparison rate when advertising home loan rates. This enables you to compare different loan products more accurately when they have different interest rates and fees.

The most common reason that a comparison rate is higher than the interest rate the lender is advertising is because of the fees that are applicable, such as application fees and ongoing annual fees. If the advertised interest rate is much lower than the comparison rate, you need to take a look at the fees on the loan to get a comprehensive understanding of the true cost of the loan.

How to calculate the comparison rate

Comparison rates you see in advertising are usually calculated for a $150,000 loan amount over a 25 year term. This may not be an accurate reflection of the comparison rate for your circumstances, as both the loan amount and term are key factors in the calculation. Generally speaking, the higher your loan amount, the lower your comparison rate for the same loan, as fees make up a smaller percentage of the total loan.

The easiest way to calculate the comparison rate for your actual mortgage amount and term is to use our handy comparison rate calculator tool, which lets you set your loan amount, loan term as well as the fees.

Below is a screenshot of our easy-to-use comparison rate calculator.

Compare home loan rates

Are you ready to compare home loan rates? You can compare loan options tailored to your needs in less than 5 minutes using our loan comparison tool. If you’re refinancing, you can even see how much you can save compared to your current loan.

Once you’re ready, you can start your loan application straight away. An accredited broker from our team will be in touch to support you throughout the process. You’ll enjoy expert advice from application to settlement.

If you prefer, you can request a call back from one of our friendly mortgage brokers who will help you compare loans and find the best one for your needs.