You've found two home loans with the same advertised rate, but one has a comparison rate half a percent higher. That difference matters, and most borrowers scroll straight past it without knowing why. Here's what it actually means and how to use it to make a smarter decision.
What is a comparison rate?
A comparison rate is a single percentage that combines a loan's interest rate with most of its standard fees, so you can compare the true cost of two loans on equal footing. The interest rate on its own only tells you what the lender charges to borrow the money. The comparison rate adds in things like application fees, ongoing monthly fees, and annual fees, rolling them into one number.
Australian law requires lenders to display a comparison rate alongside every advertised rate. The idea is simple: stop lenders from advertising a seductive 5.89% while burying $500 annual fees in the fine print. The comparison rate is that fine print, converted into a percentage.
If you're looking at our home loan service and comparing a handful of lenders, the comparison rate is a useful starting point. But only a starting point.
How the comparison rate is calculated
Here's the catch that most borrowers don't realise: every comparison rate in Australia is calculated on the same fixed scenario, a $150,000 loan over 25 years. That's the legally mandated standard, set by the National Credit Code.
That number, $150,000, hasn't reflected a typical Sydney loan for a long time. If you're buying in Castle Hill, Kellyville, or anywhere in the Hills District, you're probably borrowing $700,000 to $1.2 million. A $500 annual fee spread over a $150,000 loan looks enormous as a percentage. Spread over $900,000, the same fee barely moves the needle.
This is why the comparison rate can mislead you on a real Sydney loan. The fees are the same in dollar terms, but their percentage impact is much smaller on a larger loan.
The comparison rate was built for a $150,000 world. Sydney hasn't been that world for decades.
Use the loan repayment calculator to run your actual numbers, not the standardised ones.
Comparison rate vs interest rate: what's the difference?
The interest rate is the cost of borrowing, expressed as a percentage of your loan balance. It drives your monthly repayments.
The comparison rate is the interest rate plus the fees, recalculated as if those fees were extra interest on that standard $150,000 loan.
Here's a quick worked example:
| Loan | Interest rate | Annual fee | Comparison rate | Total fees over 30 years (on $900,000) |
|---|---|---|---|---|
| Loan A | 5.89% | $0 | 5.89% | $0 |
| Loan B | 5.79% | $395/year | 6.14% | $11,850 |
| Loan C | 5.69% | $750/year | 6.48% | $22,500 |
Loan C has the lowest interest rate but the highest comparison rate and by far the most expensive fee structure over the life of the loan. Loan A wins on total cost if you hold for 30 years, even though its rate is highest.
This is the core lesson: a lower headline rate does not automatically mean a cheaper loan. Check the comparison rate, then check the actual fees in dollar terms at your loan size.
For more on how rates work in practice, read our guide on fixed rate vs variable rate explained.
What the comparison rate does NOT include
This is where borrowers get caught out. The comparison rate includes most standard fees, but it leaves out quite a few costs that can add up:
- Break costs on fixed rate loans (can be thousands of dollars if you exit early)
- Redraw fees on some lenders (a few still charge per redraw)
- Offset account fees (some lenders charge extra for an offset account)
- Discharge fees when you exit the loan
- Lender-specific fees that fall outside the standard fee categories
- Rate lock fees on fixed loans
So two loans can have identical comparison rates and very different actual costs depending on your situation. If you plan to fix your rate and might need to break it, the comparison rate tells you almost nothing about that risk.
Read our breakdown of offset account vs redraw facility to understand how account features affect the real cost of your loan.
Why a higher comparison rate can still be the better loan
Yes, this happens. Regularly.
Some of the best value home loans on the market have higher comparison rates because they include a genuinely useful feature, such as an offset account. An offset account reduces your interest daily by offsetting your loan balance against your savings. If you keep $50,000 sitting in offset, you're only paying interest on the balance minus $50,000.
That's real money saved, and it doesn't show up anywhere in the comparison rate.
A loan with a 6.05% comparison rate that includes a full offset account can easily save you more over 10 years than a 5.85% comparison rate loan with no offset, if you're the kind of borrower who keeps savings in the account.
The comparison rate also doesn't account for flexibility. A loan with redraw, extra repayments, and no exit fees gives you options. A rock-bottom comparison rate loan with restrictions can cost you more if your situation changes.
How to actually compare home loans properly
Here's a practical checklist a Sydney broker would actually use:
- Start with the comparison rate as a rough filter. Loans with very high comparison rates relative to their interest rates usually have high fees. Worth investigating why.
- Get the actual fees in dollars. Ask the lender for a Key Facts Sheet. It lists every fee. Add them up over your actual loan term.
- Model at your actual loan size. Use the borrowing power calculator to confirm your borrowing capacity, then model fees at that amount, not at $150,000.
- Check for offset. Does the loan include a full offset account? Is it free or does it cost extra per month?
- Check flexibility. Can you make extra repayments without penalty? Can you access redraw for free?
- Consider the lender. A broker has access to 30 to 40 lenders. A bank only shows you their own products. Read our comparison of mortgage broker vs bank to understand the difference.
- Factor in your timeline. If you're likely to sell or refinance within 5 years, a fixed rate with break costs is a bigger risk than the comparison rate suggests.
A Sydney mortgage broker does all of this comparison work for you across a wide panel of lenders, at no cost to you.
If you'd like a broker to run these numbers on your actual situation, book a free strategy call and we'll do a proper loan comparison tailored to your goals.
If you're close to refinancing, our refinancing service covers how to review your current loan against current market rates and fees.
Ready to compare loans properly?
The comparison rate is a useful tool when you know its limits. If you want someone to run a real comparison across 30 to 40 lenders at your actual loan size and situation, that's exactly what we do. Call us on 1300 11 7976 or book a free strategy call and we'll find the loan that actually costs you less, not just the one with the best number in the ad.
Quick answers
Frequently asked questions
The interest rate is the percentage the lender charges on your loan balance. It drives your monthly repayments. The comparison rate adds in the standard fees on top of that rate and converts them into a single percentage, calculated on a standard $150,000 loan over 25 years. The comparison rate is always equal to or higher than the interest rate. The gap between the two tells you roughly how fee-heavy the loan is.
No. A lower comparison rate means lower fees relative to the standard $150,000 calculation, but it doesn't account for features like offset accounts, redraw flexibility, or break costs on fixed loans. A loan with a slightly higher comparison rate that includes a full offset account can save you far more money over the life of the loan if you keep savings in the offset. Always look at what's driving the comparison rate, not just the number itself.
That's the standard set by the National Credit Code when the law was written. Every lender in Australia uses the same base, which makes comparison rates consistent across lenders. The problem is that $150,000 hasn't been a typical loan size in Sydney for a long time. Most Hills District and Sydney borrowers are taking out $600,000 to $1.2 million, which means fees have a much smaller proportional impact than the comparison rate implies.
The comparison rate includes most standard fees: application fees, establishment fees, monthly account-keeping fees, annual fees, and settlement fees. It does not include break costs on fixed loans, redraw fees, offset account fees (if charged separately), discharge fees, or lender-specific fees outside standard categories. Always ask for the full fee schedule in a Key Facts Sheet.
Use it as a filter, not a final answer. It's useful for ruling out loans with obviously high fee structures. But to choose the right loan, you also need to look at features (offset, redraw, extra repayments), the actual fees in dollar terms at your loan size, lender policies, and how long you plan to hold the loan. A broker can put all of this together in one comparison.
On a $900,000 loan over 30 years, a $395 annual fee costs $11,850 in total. A $750 annual fee costs $22,500. That's before you factor in any other fees. The comparison rate makes these look bigger than they are because it calculates them on $150,000, but in dollar terms over a long loan, they are still worth paying attention to.
No. The comparison rate is a fixed calculation based on making only the minimum required repayments over 25 years on $150,000. If you make extra repayments, you pay off the loan faster and reduce your total interest paid. That benefit doesn't appear in the comparison rate at all. It's another reason the comparison rate is a guide, not a definitive cost figure.
With the RBA cash rate sitting at 4.35%, most variable home loans are sitting in the high-5% to low-6% range for the interest rate. A comparison rate for a competitive variable loan with an offset account might sit 0.1% to 0.3% above the headline rate. Fixed rates may show a larger gap if there are higher establishment or rate lock fees. The best rate for your situation depends on your loan size, loan-to-value ratio, and which lender will actually approve your application.
All three, in that order. Use the interest rate to understand your repayments. Use the comparison rate to spot fee-heavy loans. Then calculate the total cost in dollar terms at your actual loan size, over your actual loan term, including fees and the value of features like offset. That last step is the one most borrowers skip, and it's the one that matters most.
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