What is a comparison rate, and why isn't it the same as the interest rate?

A comparison rate is a single percentage that blends a loan's interest rate with most of its fees, so you can compare loans on a more even footing. The short version: the interest rate tells you what the loan looks like, and the comparison rate tells you closer to what it actually costs.

Here's the 30-second answer, then the detail below.

The quick answer

When you see a home loan advertised, you'll usually see two numbers side by side: the interest rate and the comparison rate. The comparison rate is almost always the higher of the two, and that's not a trick. It's the rate with the fees baked in. If the comparison rate is a lot higher than the interest rate, that's your clue the loan carries chunky fees worth a closer look.

Why does the comparison rate exist?

Because a low advertised interest rate can hide a not-so-low loan. Lenders are required by law to publish a comparison rate alongside the interest rate precisely so a cheap-looking headline number can't disguise a pile of fees.

Think of the interest rate as the sticker price on a car and the comparison rate as the drive-away price. One looks better in the ad. The other is closer to what leaves your account.

What's included in a comparison rate?

The comparison rate rolls in the interest rate plus most of the standard fees attached to the loan, such as application or establishment fees and ongoing account-keeping fees. So it captures a fuller picture of the cost than the interest rate alone.

What it doesn't capture is just as important to know.

What a comparison rate leaves out

This is where people get caught. The comparison rate does not include everything, and the things it misses can matter a lot:

• Fees that can't be known in advance, like redraw fees, early-exit or break costs, and late-payment fees.
• Government charges.
• Lender fees that are one-off or situational.
• The value of features you might actually use, like an offset account or free extra repayments.

So a loan with a slightly higher comparison rate but a genuinely useful offset account could work out cheaper for you than a lower-comparison-rate loan with no features. The comparison rate is a guide, not the final word.

The catch nobody mentions: the comparison rate is based on a fictional loan

Here's the honest bit. Every comparison rate you see is calculated on a standard example set by regulation, typically a loan of $150,000 over 25 years. Almost nobody borrows exactly that. So the comparison rate is a fair way to line up loans against each other, but it is not the rate for your loan on your amount over your term.

(A small clarification, because we can't help ourselves: yes, that means the comparison rate is technically a rate for a loan you are not taking out, calculated over a term you are probably not choosing, on an amount you are almost certainly not borrowing. It is still genuinely useful. It just isn't yours. We felt you should know.)

So how should I actually use it?

Use the comparison rate as a first-pass filter, not the finish line. It's brilliant for spotting a headline rate that's hiding heavy fees. But once you've shortlisted, the real question is what a given loan costs you, with your loan size, your term, and the features you'll genuinely use.

That last step is the fiddly one, and it's the bit we love. We'll take the loans that look good on paper and work out what they'd actually cost you in practice, fees, features and all.

Want your numbers checked?

If you're comparing loans and the rates are making your head spin, that's exactly the kind of afternoon we enjoy. We'll do the comparing and tell you honestly which loan is the cheaper fit for your situation, not just which one has the prettiest ad.

Don't get FOMO. Get FOMO. Know the numbers, or find someone who does.

This is general information only and doesn't take your personal circumstances into account. Rates, fees and lender policies change, so let's have a proper chat about your situation.

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