Every home loan advertisement in Australia shows two numbers, an interest rate and a comparison rate. They’re rarely the same, and the gap between them tells you something important about the loan.
What the interest rate tells you
The interest rate is what the lender charges on the money you’ve borrowed. It’s the figure used to calculate your actual monthly repayment, and it’s the number most people focus on first.
What the comparison rate tells you
The comparison rate is designed to show the “true cost” of a loan by folding in most standard fees and charges, application fees, ongoing account fees, and, in most cases, the effect of the interest rate itself, into a single annualised figure. It exists because a loan with a low interest rate but high fees can end up more expensive than a loan with a slightly higher rate and no fees.
Comparison rates are required by law under the National Credit Code, and they’re calculated on a standard loan amount and term (commonly $150,000 over 25 years, though this can vary) so that different lenders’ comparison rates can be compared like for like.
Why the two numbers can be far apart
A large gap between the interest rate and comparison rate usually signals one of two things:
- High ongoing fees. A monthly account-keeping fee or annual package fee adds up over the loan’s life and pushes the comparison rate up, even if the interest rate itself looks competitive.
- An introductory or honeymoon rate. Some loans advertise a low rate for the first one or two years before reverting to a higher standard variable rate. The comparison rate accounts for this reversion, so it often sits noticeably above the advertised “from” rate.
A small gap generally means the loan has few or no ongoing fees, what you see in the interest rate is close to what you’ll actually pay.
Where the comparison rate falls short
The comparison rate isn’t perfect. It’s calculated on a standard loan size and term, so it may not reflect your actual situation if you’re borrowing significantly more or less than the standard amount used in the calculation, or if you plan to pay the loan off faster than the standard term. It also excludes some fees that only apply in specific circumstances, like a redraw fee you’d only pay if you use that feature, or a break cost that only applies to fixed loans.
How to use both numbers together
Use the interest rate to estimate your regular repayment, and the comparison rate as a sense check on the loan’s overall cost relative to other options. If you’re comparing two loans with similar comparison rates but very different interest rates, look closely at the fee structure, the loan with the higher rate and lower comparison rate might actually work out cheaper if you don’t intend to use the features driving that fee difference.
Neither number replaces reading the loan’s actual fee schedule. If a fee structure looks unusual, ask the lender directly before you apply.