Next to every advertised home loan rate sits a second number: the comparison rate. It exists to stop lenders hiding fees behind a shiny headline rate. Useful, but it misleads as often as it helps, because of how it is calculated.
What it includes
The comparison rate rolls the interest rate plus most compulsory fees (application, valuation, monthly and annual fees) into a single percentage, so a loan with a low rate and heavy fees can be compared honestly against a higher-rate, no-fee loan. A big gap between the headline and comparison rate is a red flag worth investigating.
The catch: it is calculated on a fantasy loan
By law, comparison rates are computed on a $150,000 loan over 25 years. The average new Australian loan is several times that. Because fixed fees shrink in significance as loans grow, the comparison rate overstates fee impact on a $700,000 loan and can make a genuinely cheap product look worse than it is.
What it leaves out
- Offset accounts and their package fees if optional.
- The value of features: redraw, splitting, repayment flexibility.
- Cashbacks and discharge costs.
- Introductory rates reverting: the comparison rate does capture this, which is exactly when it is most useful.
How to actually compare loans
Compare total cost over YOUR loan size and YOUR realistic horizon (most loans are refinanced within 5 years), including fees, features and cashbacks. That is a spreadsheet exercise, and it is one Nathan runs for clients on every recommendation. Or start simple: model repayments with the repayment calculator.