What is a home loan comparison rate?

When shopping for a home loan, it’s important to get a good understanding of how much it could cost you each year compared to other products. If you’ve ever found yourself asking ‘what is a comparison rate?’, the here, we explain this important piece of home loan terminology, and how it works. 

What is a home loan comparison rate?

A home loan comparison rate is an estimate of how much a loan could cost each year when interest, as well as most ongoing fees and charges, are added up. Lenders are legally required to show customers a comparison rate alongside a product’s interest rate. The comparison rate is expressed as an annual percentage rate.

What is the difference between the home loan interest rate and the home loan comparison rate?

• The interest rate reflects how much interest you will be charged per year on the balance of your loan, whether your loan is fixed or variable rate. This will give you an idea of your monthly repayments.
• The comparison rate combines the interest rate plus most fees and charges that come with the loan. This is designed to help you identify the cost of the loan more accurately and make it easier to compare products.

How are comparison rates calculated?

Home loan comparison rates are calculated based on a $150,000 loan, over a 25-year loan term. Comparison rates take into account a loan’s:

• interest rate (including any revert rate that applies to the loan after a set period of time)
• fees and charges (including upfront costs like establishment fees and valuation fees and ongoing costs such as monthly or annual fees)
• repayment frequency

An example of how comparison rates are displayed can be seen in Canstar’s comparison tables.

The comparison rate should be used as a guide only, to compare ‘like for like’ products. This is because the average mortgage size in Australia is much higher than $150,000.  As well as that, your home loan may be longer or shorter than 25 years.

The comparison rate also does not take into account all fees and charges related to a loan. For example, it does not include fees and charges that are incurred in specific circumstances, such as early repayment fees and redraw fees. It also does not consider potential cost saving options such as fee waivers and offset accounts.

Additionally, it does not include external government fees and charges that usually apply to purchasing a property, such as stamp duty.

Does the comparison rate make a big difference?

The comparison rate for a loan can reveal quite a difference in costs between two loans that have the same advertised interest rate.

If you were just considering interest rates, you might think two loans cost the same. But the comparison rate can help to reveal whether one loan costs more than the other.

Here’s a hypothetical example of how that may work:

Impact of fees on comparison rate

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Source: www.canstar.com.au – 27/01/2022. Assumes a total loan term of 30 years. Based on three loans with the average interest rate and differing hypothetical fee amounts. Average interest rate based on owner-occupier variable loans on Canstar’s database available for a loan amount of $500,000, 80% LVR and principal & interest repayments; excluding introductory and first home buyer only loans. Comparison rates calculated based on a $150,000 loan amount over a total loan term of 25 years. Read the Comparison Rate Warning.

Choosing the best possible loan for your situation could mean thousands of dollars saved in fees over the years. Checking the comparison rate can help you to choose a loan with an overall annual cost you can afford. However, be aware that a more expensive loan may offer different features, such as an offset account, redraw facility or portability, which may contribute to its overall value.

Where do you find the comparison rate?

Lenders are legally required to display comparison rates whenever they advertise a home loan interest rate. For example, you may see a home loan advertisement with the text: Variable interest rate 3.29%, comparison rate 3.70%, based on a loan of $150,000 over 25 years. Lenders must also include a comparison rate warning about the accuracy of the comparison rate.

Another helpful place to look is the key facts sheet, where the lender should specify information including the comparison rate, interest rate, and the total amount to be paid back over the life of the loan.

Canstar lists the comparison rate alongside the advertised interest rate for each loan in our comparison tables. We also enable consumers to sort home loan products by comparison rate. You can find comparison rates on home loans for various purposes – refinancing, first home buyers, next home buyers, investing, line of credit and construction home loans.

Lenders must also display comparison rates for personal loan and car loan products (however, these rates are based on different loan amounts and loan terms). Canstar also displays comparison rates and interest rates for these products.

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