A comparison rate folds a loan’s fees into a single percentage so you can compare products on more than the advertised rate. It is legally required in Australian advertising and it is genuinely useful. But it is calculated on a standardised $150,000 loan over 25 years, which is nothing like most Sydney mortgages, and it ignores anything optional. Use it to rank products, never to predict your own cost.
Every home loan advertisement in Australia carries two numbers: the interest rate, and a slightly higher comparison rate. The second exists because lenders were once able to advertise a very low rate and recover the difference in fees. Knowing what the comparison rate does and does not capture is the difference between using it well and being misled by it.
What goes into it
The comparison rate combines the interest rate with the fees you cannot avoid if you take the loan:
- The interest rate itself
- Application and establishment fees
- Ongoing account or package fees
- Settlement and valuation fees charged by the lender
It then expresses the total as a single annual percentage, so a loan with a low rate and high fees and a loan with a higher rate and no fees can be compared on one number.
What it deliberately leaves out
The exclusions are where the trouble starts. A comparison rate does not include:
- Government charges such as transfer duty and registration fees.
- Fees that depend on your behaviour — redraw fees, late payment fees, and notably break costs on a fixed loan, which can be very large.
- Lenders Mortgage Insurance, which for a low-deposit borrower is often the single biggest cost of the loan.
- What happens after any introductory period ends.
That last one matters more than it sounds. A loan with a discounted rate for two years and a higher rate afterwards can advertise a flattering comparison rate while costing you considerably more over the full term.
The $150,000 problem
By law the comparison rate is calculated on a $150,000 loan over 25 years. That standardisation is what makes products comparable. It is also why the number is a poor guide to your actual cost, because almost no Sydney mortgage looks like that.
The distortion runs in a specific direction. Fixed-dollar fees loom large against $150,000 and shrink to insignificance against $900,000. So a loan with a $400 annual package fee looks materially worse in its comparison rate than it would ever be on a large mortgage, while a small difference in the interest rate — which scales with the balance — is underweighted.
The practical rule: the larger your loan, the more the interest rate matters and the less the fees do. On a large mortgage, a product with a slightly higher comparison rate but a lower interest rate is frequently the cheaper loan.
The comparison rate calculator lets you run the numbers at your actual loan size and term, which is the comparison that matters.
Where it genuinely helps
None of this makes the comparison rate useless. It is very good at one job: exposing a loan whose advertised rate is artificially low because the fees are high. If you see a large gap between the interest rate and the comparison rate, that gap is telling you something real, and it is worth asking what the fees are.
A small gap generally means a simple, low-fee product. A large gap means the fees are doing heavy lifting, and you should find out whether those fees apply to you.
What to compare instead
For a decision on a specific loan, the comparison rate is a screening tool, not the answer. What actually determines your cost:
- The interest rate applied to your balance, over the years you will realistically hold the loan — which for most people is far less than 25 or 30.
- The fees you will actually incur, given how you intend to use the loan. An annual package fee is money wasted if you never use the offset account, and excellent value if you keep a large balance in it.
- The features you will really use. Offset, redraw, split, extra repayments. Paying for flexibility you never touch is a common and avoidable cost.
- What happens at the end of any fixed or introductory period, which is where a lot of the true cost hides. See what happens when your fixed rate ends.
The loan comparison calculator compares two specific loans over a period you choose, which is closer to a real decision than any single advertised percentage.
Common questions
Because it adds the compulsory fees to the interest cost. If the two are identical, the loan has no compulsory fees. The size of the gap is a rough measure of how fee-heavy the product is.
Not on a large mortgage. The standardised $150,000 calculation overweights fixed fees and underweights the interest rate, so it can rank a genuinely more expensive loan first. Compare at your own loan size.
No. For a borrower with a small deposit, LMI is frequently the largest single cost of the loan and it is entirely absent from the comparison rate.
Yes, and they are least reliable there. The rate shown assumes the loan reverts to a standard variable rate after the fixed term, and it excludes break costs entirely — which are the main financial risk of fixing.
It depends entirely on whether you use what the package includes. If a large offset balance saves you more interest than the fee costs, it is worth it. If the offset sits near zero, you are paying for nothing.