Comparison Rates Explained: What They Tell You, and What They Don’t

The short answer

A comparison rate combines a loan’s interest rate with most of its upfront and ongoing fees into a single percentage. Lenders must show it alongside their advertised rate, so you can compare the true cost of different loans.

It’s a useful starting point. But it’s based on a standard loan that’s much smaller than most people borrow today, so it can tell a misleading story.

The catch for bigger loans

Every comparison rate is calculated on the same standard loan: $150,000 over 25 years. Fees weigh heavily on a loan that size, but much less on a larger one.

Example: a $395 annual package fee is roughly 0.26% of a $150,000 loan, so it pushes the comparison rate up noticeably. On a $750,000 loan, the same fee is only about 0.05%.

That means for most borrowers today, the comparison rate overstates the real cost of package loans, and can make a basic loan look cheaper than it really is for you.

What it leaves out, and what it can reveal

Not included: LMI, government charges, break costs, optional fees, and the value of features like an offset account.

Watch for big gaps: if a comparison rate is well above the advertised rate, it’s often a sign of something worth checking:

• A honeymoon rate: a low introductory rate that jumps after the first year or two.
• A fixed rate with a high revert rate: the comparison rate includes the rate you’ll roll onto after the fixed term.
• High fees: significant upfront or ongoing charges.

How to use it

Use the comparison rate to shortlist, not to decide. Then compare loans on your actual loan size, the fees you’ll really pay, and the features you’ll actually use.

With access to over 40 lenders, our team of lending specialists can run that comparison for you, so you see the true cost of each option for your situation.

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General information only. This article does not consider your objectives, financial situation or needs and is not credit, financial or tax advice. Lender fees and rates vary and change regularly. Examples are illustrative. Seek advice from a licensed credit adviser before acting. Insight Property Finance.