Australian lenders are required by law to display a comparison rate alongside every advertised home loan interest rate. The comparison rate is always higher than the advertised rate. Understanding why that gap exists, and how large it is, tells you a lot about the real cost of the loan. Here is how it works.
The advertised interest rate (sometimes called the nominal rate or headline rate) is the annual percentage charged on your loan balance. If a bank advertises a rate of 5.99% p.a., that is the rate applied to your outstanding principal to calculate your interest charges.
The advertised rate is the dominant figure in bank marketing because it is the lowest number associated with the loan. It does not include fees. It does not account for the structure of the loan. It is the interest cost in isolation.
The comparison rate is a standardised calculation that incorporates both the interest rate and most fees associated with the loan, expressed as a single annual percentage. It was introduced under the National Consumer Credit Protection Act to give consumers a more complete picture of loan cost for comparison purposes.
The comparison rate is calculated using a standardised loan amount of $150,000 over a 25-year term. This is specified in law so that every lender calculates it on the same basis, making comparison possible.
The fees incorporated into the comparison rate include: establishment or application fees, monthly or annual account-keeping fees, and other ongoing fees disclosed by the lender.
The size of the gap between the advertised rate and the comparison rate is a proxy for the fee load of the loan. A small gap means relatively low fees. A large gap means significant fees are embedded in the cost of the product.
Example 1 (low-fee loan): Advertised rate 5.99% p.a., comparison rate 6.03% p.a.. Gap of 0.04 percentage points. This loan has minimal fees, likely just a small annual fee or a modest application charge.
Example 2 (high-fee loan): Advertised rate 5.79% p.a., comparison rate 6.34% p.a.. Gap of 0.55 percentage points. This loan has substantial fees built in. The lower advertised rate is more than offset by the fee load when you look at the total cost over time.
In this comparison, Example 2 has the lower advertised rate but is almost certainly the more expensive product for most borrowers once fees are included. Sorting by comparison rate rather than advertised rate gives a better view of true cost.
Take a $500,000 loan over 30 years. Two lenders offer the following:
Lender A: Advertised rate 6.10% p.a., comparison rate 6.15% p.a. Annual fee of $395.
Lender B: Advertised rate 5.99% p.a., comparison rate 6.42% p.a. Application fee of $800, monthly fee of $20 ($240 per year).
Monthly repayment on Lender A ($500,000 at 6.10%): approximately $3,036. Annual fee adds $33/month equivalent. Effective monthly cost: $3,069.
Monthly repayment on Lender B ($500,000 at 5.99%): approximately $2,997. Monthly fee adds $20. Effective monthly cost: $3,017. But the $800 upfront application fee adds approximately $2.22/month over 30 years, bringing total monthly cost to $3,019.
In this example, Lender B is marginally cheaper on a total-cost basis despite having a larger gap between the advertised rate and comparison rate, because the application fee is a one-off cost spread over 30 years. The comparison rate captured this correctly: at 6.42% vs 6.15%, Lender B looks more expensive per the comparison rate, and over 30 years it broadly is.
The key takeaway is that the gap between advertised and comparison rate flags fee-heavy products and prevents the advertised rate from being the only decision factor.
The comparison rate has real limitations. Because it is calculated on $150,000 over 25 years, it overstates the impact of flat fees on larger loans. A $600,000 loan with a $10 monthly fee will show a comparison rate that makes the fee look proportionally more expensive than it actually is relative to the loan size. For larger loans, the fee impact is diluted, and the comparison rate will overstate the true cost difference from fees.
The comparison rate also does not capture honeymoon or introductory rates, redraw facility costs, offset account fees, or the costs of fixing your rate and then breaking the fixed period early. These can be material costs and require separate review of the loan product documentation.
Sort by comparison rate as a first filter to identify fee-heavy products. Then cross-check the components: application fee, ongoing fee, redraw fee. For loans above $400,000, calculate the actual dollar cost of each fee component directly rather than relying solely on the comparison rate percentage. The comparison rate is a useful directional tool, not a complete picture.
Compare home loan rates by advertised rate and comparison rate side by side.
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