Comparison Rate is a single percentage figure that combines a loan's interest rate with most fees and charges—giving you the "true" cost of borrowing so you can compare loans accurately.
Why Comparison Rates Exist
Lenders advertise low interest rates to attract borrowers, but hidden fees can make a "cheap" loan expensive. The comparison rate forces transparency.
Example:
- Loan A: 5.99% interest, $0 application fee, $10/month account fee
- Loan B: 6.29% interest, $500 application fee, $0 account fee
Which is cheaper? The comparison rate tells you.
How Comparison Rate Is Calculated
The comparison rate includes:
- Interest rate (the main rate)
- Application fees (upfront costs)
- Monthly/annual account fees
- Valuation fees (sometimes)
Not included:
- LMI (Lenders Mortgage Insurance)
- Early repayment fees
- Late payment fees
- Redraw/offset account fees
Standard Assumptions
Australian law requires comparison rates to be calculated based on:
- Home loans: $150,000 loan over 25 years
- Personal loans: $10,000 loan over 3 years
- Car loans: $30,000 loan over 5 years
Important: If your loan amount or term differs, the comparison rate may not be accurate for you.
Real-World Example: Home Loan
Loan A
- Interest rate: 5.79% p.a.
- Application fee: $0
- Monthly fee: $8
- Comparison rate: 5.85% p.a.
Loan B
- Interest rate: 5.89% p.a.
- Application fee: $600
- Monthly fee: $0
- Comparison rate: 5.95% p.a.
Winner: Loan A is cheaper overall (5.85% vs 5.95%).
Over 25 years on a $400,000 loan:
- Loan A total cost: ~$650,000
- Loan B total cost: ~$660,000
- Savings with Loan A: $10,000
Real-World Example: Car Loan
Loan A
- Interest rate: 6.99% p.a.
- Establishment fee: $0
- Monthly fee: $10
- Comparison rate: 7.49% p.a.
Loan B
- Interest rate: 7.49% p.a.
- Establishment fee: $350
- Monthly fee: $0
- Comparison rate: 7.99% p.a.
Winner: Loan A is cheaper (7.49% vs 7.99%).
On a $40,000 car loan over 5 years:
- Loan A total cost: ~$47,500
- Loan B total cost: ~$48,800
- Savings with Loan A: $1,300
When Comparison Rates Are Misleading
1. Your Loan Amount Differs
Comparison rates assume $150K for home loans, but if you're borrowing $600K, the upfront fees are diluted differently.
Example: $600 application fee
- On $150K loan: Adds ~0.10% to comparison rate
- On $600K loan: Adds ~0.03% to comparison rate
2. Your Loan Term Differs
Comparison rates assume 25 years for home loans. If you're paying off in 10 years, monthly fees have less impact.
Example: $10/month account fee
- Over 25 years: $3,000 in fees
- Over 10 years: $1,200 in fees
3. Introductory (Honeymoon) Rates
Comparison rates don't account for rate changes after the honeymoon period ends.
Example:
- Year 1: 4.99% p.a. (honeymoon rate)
- Years 2-25: 6.49% p.a. (revert rate)
- Comparison rate: 6.35% p.a. (looks good, but most of your loan is at 6.49%)
4. Variable vs Fixed Rates
Comparison rates assume the advertised rate stays constant. For variable loans, rates fluctuate with the RBA cash rate.
What Comparison Rates Don't Include
- LMI (Lenders Mortgage Insurance): Can add $10K-$30K to your loan
- Offset account fees: Often $10-$15/month
- Redraw fees: $20-$50 per withdrawal
- Early exit fees: $150-$800 to close the loan early
- Break costs: On fixed loans, can be thousands if you exit early
Tip: Always ask your broker or lender for a full fee breakdown.
How to Use Comparison Rates
Step 1: Compare Loans with Similar Features
Only compare like-for-like:
- Variable to variable
- Fixed to fixed
- Same loan term (if possible)
Step 2: Check the Fine Print
Look for:
- Honeymoon rates that revert higher
- Offset account fees (not in comparison rate)
- Redraw restrictions
- Early exit penalties
Step 3: Calculate Your Own Total Cost
Use a loan calculator with YOUR loan amount and term. Add in all fees manually.
Step 4: Talk to a Broker
NIK Finance brokers compare 100+ lenders and calculate the true cost for your specific situation.
Final Thoughts
Comparison rates are a useful starting point, but they're not perfect. They help you spot hidden fees, but don't capture everything.
Best practice:
- Use comparison rate as a tiebreaker between similar loans
- Calculate your own total cost based on your loan size and term
- Factor in offset accounts, redraw flexibility, and early exit fees
- Work with a broker to find the best loan for your needs
If two loans have similar comparison rates but one offers an offset account and the other doesn't—the offset account could save you $20,000+ in interest over the life of the loan.