Everything to know about comparison rates

What are comparison rates and how are they different from interest rates?

When you’re shopping around for a home loan, think of a comparison rate as a guide for the true cost of your loan.

Interest rates will tell you how much interest you’ll pay with a loan but won’t take into account additional fees and charges. Comparison rates help you calculate the true cost of your home loan by combining the interest rate on your loan, plus certain fees and charges you can expect to pay.

How are comparison rates calculated?

Comparison rates are designed to help borrowers compare the cost of different loans and make an informed choice. For consistency, the law requires home lenders to calculate their comparison rates in the exact same way. Unless you are seeing a personalised comparison rate, the comparison rates are based on a $150K home loan over a period of 2 years

A comparison rate will also include:

• Upfront costs charged by the lender like application fees
• Ongoing fees that will be incurred during the 25-year term, like monthly service fees
• Any revert rates. A revert rate is the interest rate applicable to the loan after the end of any honeymoon rate, interest only or fixed rate period.

While comparison rates can be useful, there are some caveats to consider. Unless you have a very healthy deposit, most buyers will take out a loan that is much larger than $150K and it can be for a period shorter or longer than 25 years. As well as this, there are a few factors that a comparison rate doesn’t include as we discuss below. Use the comparison rate as a guideline, but make sure it’s not the only thing you’re taking into account when choosing a home loan.

What a comparison rate doesn’t include:

Comparison rates don’t take everything into account. The cost of your loan could be influenced by fees and costs that aren’t included in the comparison rate. A comparison rate won’t include:

• non-standard fees charged by banks like early repayment and redraw fees
• certain benefits like offset accounts or fee waivers that may make a big difference to your loan.

Comparison rates can reveal a lot about what to expect from your home loan, but they don’t always give you the whole picture. Use them as a guide, but factor in your own personal circumstances, budget and ambition when deciding where you borrow your money from.

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