What Is a Mortgage Comparison Rate? Everything You Need to Know

Comparison rate is a representation of how much it would cost you for a home loan, which is calculated by calculated using a formula that combines the interest rate with mandatory loan fees, expressed as an annual percentage rate under the National Credit Code.

While it doesn’t tell you exactly how much it would cost you, it’s meant to give you a more accurate representation to help you compare the cost of different loan products or lenders.

In this guide, we’re taking a closer look at comparison rates, how it works in Australia, and everything else you need to know about it.

Let’s get started!

What is a Comparison Rate in Mortgage?

A comparison rate is a percentage figure that reflects the true cost of a home loan by combining the loan’s interest rate plus most of its fees and charges. 

To better understand, it’s like an “apples-to-apples” rate that helps you see what you’ll really pay each year, rather than just the headline interest rate. 

This way, you get a more comprehensive picture than the interest rate alone, which makes it useful when comparing different loan products.

By law, the Australian Securities & Investments (ASIC) requires every lender to display the comparison rate next to its advertised interest rate. 

This requirement ensures borrowers aren’t misled by a low rate that hides large fees.

Why Comparison Rates Matter for Homebuyers

The comparison rate is one critical aspect of mortgages that hold immense value to homebuyers. You must carefully dig into it if you’re in the home loan market, since comparison rates directly influence your financial liability.

• True cost awareness: They highlight fees you might otherwise overlook. If two loans have the same interest rate but very different comparison rates, the higher comp rate loan comes with more fees.

• Consumer protection: Comparison rates were made mandatory, so lenders can’t lure borrowers with deceptively low rates that hide big fees. Seeing both numbers side-by-side helps you avoid surprises.

• For first-home buyers and upgraders: It’s especially useful if you’re new to home loans. It gives a snapshot of annual loan cost without digging through fine print. 

However, keep in mind that a comparison rate is just a guide. While it can show a more accurate representation of what it costs you for a home loan, your actual cost may differ based on your loan size, term, and features.

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We’ll help you find home loans with favourable comparison rates, with unbiased expert guidance that acts in your best interests. 

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Difference Between Comparison Rate and Interest Rate

Interest rate is the percentage charged on your loan principal each year (what most ads focus on). It does not include any other fees or charges.

But a comparison rate includes the interest rate plus loan fees & charges (e.g. setup fees, annual account fees, etc.). These are combined and shown as a single percentage figure for ease of comparison.

For that reason, the comparison rate would be higher than the advertised interest rate.

For example, if a loan advertises 5.80% but has 0.10% per year in fees, the comparison rate might be 5.90% (5.8% + 0.1%).

Two things you can easily figure out by comparing a loan’s interest rate and comparison rate:

• If the comparison rate equals the interest rate, that loan has virtually no extra fees.

• If the comparison rate is much higher (several points above the interest rate), it means the loan carries significant fees – a cue to ask the lender for a fee breakdown.

That said, make sure to always read both numbers and look out for figures that don’t match up.

What Fees Are Included in the Comparison Rate?

The comparison rate typically adds up all required fees a borrower pays to the lender. This includes:

• Application fees.

• Valuation fees.

• Settlement or establishment fees.

• Monthly account-keeping fees.

• Annual package fees.

• Admin fees, etc.

What Fees Are Not Included?

Think of the comparison rate as covering the fixed fees you’d definitely pay (application, annual, etc.), but not things like government taxes or flexible features. 

This is why comparison rates can’t capture 100% of your eventual costs. Here’s a more detailed breakdown of what’s not included in it…

• Government charges: Stamp duty, mortgage registration and other state or local government taxes/charges are not included. These vary by state and your purchase price, and are excluded from the comparison rate formula.

• Lender’s Mortgage Insurance (LMI): Any compulsory LMI (for loans over 80% LVR) is not part of the comp rate.

• Optional/conditional fees: Charges for optional features (like using a redraw facility or an offset account) are excluded.

• Discounts & rebates: Any promotional discounts or waivers aren’t shown in the comparison rate.

How is the Comparison Rate Calculated?

All Australian lenders are required to use the same National Credit Code formula to compute their comparison rates. 

As per the law, the comparison rate calculation used in advertisements assumes a $150,000 loan over 25 years with principal+interest repayments. This ensures uniformity (in theory) so you can compare loans.

But this “one size fits all” example may not match your actual loan since most Australians borrow much more. It just serves to give you a common reference.

So once you find a lender, you can ask them for a tailored comparison rate that’s specific to your loan requirements.

Using Comparison Rates to Shop Wisely

• Look for big gaps: If a loan’s advertised rate and its comparison rate are very different, it indicates high fees. A large gap is a red flag.  Conversely, a small gap means few fees.

• Compare similar loan types: Use comparison rates to compare like-for-like loans (e.g. two standard variable loans, or two fixed loans). Remember that features (like offset accounts) aren’t reflected in comparison rate, so weigh those separately.

• Ask questions: If you see a tempting interest rate, check the comparison rate. If it’s high, ask your broker or lender what fees are being added.

• Custom estimates: If you plan to borrow more or for a different term than $150k/25y, you can use online calculators or ask the lender to compute a comparison rate for your scenario to get a more accurate picture.

That said, do not rely on comparison rates alone. It’s a helpful guide, but also consider loan features you need (flexibility, offset, redraw, etc.) and your own loan amount/term. The comparison rate is only one tool for choosing a home loan.

Frequently Asked Questions (FAQs)

Is the comparison rate the rate I will actually pay?

The comparison rate is a standardised example rate, not your personal interest rate. 

It assumes a 25-year, $150k loan. If you borrow more or have a different term, your actual interest cost could be different.

Think of it as a guide to compare loans, not a guaranteed rate.

If the comparison rate equals the interest rate, does that mean I pay no fees?

Generally, yes – it means the loan has no (or very low) mandatory fees built into the calculation. Many “no-frills” basic loans advertise the same interest and comparison rate, which tells you there aren’t extra package or account fees.

Why doesn’t it include stamp duty or LMI?

Stamp duty (state taxes) and Lender’s Mortgage Insurance are not charged by the lender, and they vary greatly by loan and state. 

The comparison rate only covers fees charged by the lender, so government charges and LMI are excluded. Hence, you must budget for those costs separately.

My loan has an offset account/redraw – is that in the comparison rate?

No. Features like offset or redraw are excluded because they reduce costs rather than add fixed fees. 

For example, having an offset can lower your interest paid, but the comparison rate won’t show that benefit. It simply ignores variable features.

How can I lower my comparison rate?

For a lower comparison rate, you need to look for loans with fewer fees. For instance, loans with no annual or ongoing fees will have a comp rate close to the interest rate.

You can also choose a lender with low or waived fees to reduce the comparison rate impact.

This article contains general information only and is not personal financial or credit advice. Consider your objectives, financial situation and needs, and seek professional advice before acting.

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