What is a comparison rate?

Regulators require lenders to disclose a comparison rate built on representative assumptions, so customers can compare loans like for like. The lender spreads upfront fees such as establishment and application fees across the loan term, adds the ongoing account or service fees, and converts the total into an annual percentage of the loan amount. That percentage is added to the advertised interest rate to produce the comparison rate.

The calculation method is prescribed, but the loan amount and term behind a quoted figure are the ones the lender states, and for home loans many lenders use $150,000 over 25 years. Published figures are worked out from the loan's actual repayment pattern and compounding, so they can differ slightly from the simple "interest rate plus annualised fees divided by principal" approximation.

A comparison rate typically includes upfront establishment or application fees, documentation fees, ongoing monthly or annual account fees, and any broker fees paid to the lender. In other words, the costs every borrower on that loan will pay.

It usually excludes government charges such as registration fees and stamp duty, fees that depend on future events such as early exit penalties, late payment fees and default interest, and charges for optional features or conditional services. Because those items are left out, the comparison rate can understate what a loan costs if you trigger them.

Two comparison rates are only comparable when they rest on the same loan amount and term, so check the assumptions each lender states. That matters most when you compare across classes of credit, or against an advertised example worked on a different amount. Comparison rates are also a consumer credit disclosure, required where a rate is advertised for credit regulated by the NCCP Act, so they are not published for business or equipment finance. Offset accounts, redraw, split loans and interest-only periods change the effective cost but are not captured, so a lower comparison rate does not always mean the cheapest loan for you.

When comparing, check the assumptions behind each figure, ask the lender for a full cost breakdown or amortisation schedule, confirm which fees were included, and weigh the features you need, including fixed versus variable. Compare total repayments over your intended term, not just the rate, and read the comparison rate schedule and the precontractual statement for the exact disclosure.