Comparison Rate: What It Includes and What It Hides

Key takeaways

• Comparison rates are mandated by the National Consumer Credit Protection Act and use a fixed $150,000 / 25-year example.
• They include establishment fees, ongoing account fees and valuation fees.
• They exclude government charges, redraw fees, break costs and fees that depend on your behaviour.
• On a $750,000 loan the standardised example spreads fixed fees across five times less debt than you actually hold, muting their effect.

What goes into the number?

The comparison rate captures the cost of credit that a lender can know in advance:

• The interest rate itself
• Application or establishment fees
• Ongoing monthly or annual account-keeping fees
• Valuation and settlement fees charged by the lender

It deliberately excludes anything conditional, because the calculation cannot know whether it will apply to you.

What does it leave out?

The exclusions are where real cost often sits:

• Government charges — stamp duty on the property, mortgage registration and transfer fees.
• Lenders Mortgage Insurance, which on a 90% LVR loan can run to tens of thousands of dollars.
• Break costs on fixed loans, which depend on wholesale rates at the moment you exit.
• Redraw, early repayment and discharge fees.
• Offset account benefits — a genuine saving the comparison rate cannot represent.

A package loan with a $395 annual fee and a linked offset frequently shows a worse comparison rate than a no-frills product, while costing a large borrower less in practice.

Why does the $150,000 assumption distort things?

Fixed fees are diluted by loan size. A $600 establishment fee on the standardised $150,000 loan is 0.40% of the balance. The same fee on a $750,000 loan is 0.08%.

The larger your loan, the more the headline interest rate dominates and the less the comparison rate tells you that you did not already know.

How should you actually compare two loans?

Model your own loan rather than the standard one. For each option, add up over the period you realistically expect to hold the loan — often five years, not twenty-five:

1. Total interest at the actual rate on your actual balance
2. Plus every fee you will genuinely incur
3. Minus the interest an offset balance would save you

Compare the totals in dollars. Two loans separated by 0.10% on the comparison rate can be thousands of dollars apart once an offset is in the picture.

Frequently asked questions

Is a lower comparison rate always the better loan?

No. It is a useful screen for loans of a similar size to the $150,000 standard example, but it cannot value an offset account, redraw flexibility or a rate that suits your circumstances. For larger loans, model the total dollar cost over your expected holding period instead.

Do lenders have to show a comparison rate?

Yes. Where a lender advertises an interest rate for a consumer credit product, the National Consumer Credit Protection Act requires a comparison rate to be shown with it, along with the standard example it is based on.

Why do two lenders show different comparison rates for the same interest rate?

Because their fee structures differ. One may charge a higher establishment fee, the other an ongoing annual package fee. The comparison rate is doing exactly its job in that case — surfacing a cost difference the headline rate hides.

Related reading

• The Home Loan Repayment Formula, Worked Step by Step
• How a 0.25% Rate Rise Changes Repayments, by Loan Size
• Amortisation Schedules: Reading Your First 12 Months

Sources

• National Consumer Credit Protection Act 2009, comparison rate requirements — Federal Register of Legislation
• Comparison rate guidance for consumers — ASIC Moneysmart