What is a rate?

An interest rate is normally quoted as a percentage per annum, but interest may be applied monthly or daily. The periodic rate is the nominal rate divided by the number of compounding periods, and because each period's interest joins the balance, the effective annual rate sits above the nominal rate whenever compounding happens more than once a year: r_eff = (1 + r_nom / n)^n - 1.

The real rate strips out inflation (roughly, nominal rate minus inflation) to show the change in purchasing power. And fees such as establishment, ongoing and early repayment charges change the true cost, which is what the comparison rate is designed to capture. Simple interest is charged on the principal only (I = P x r x t), while compound interest adds interest to the balance each period (A = P x (1 + r/n)^(n x t)).

The rates banks and lenders offer reflect policy and market factors. The RBA's target cash rate steers short-term market rates and is the reference point for many lenders, who often move variable home loan rates when it changes, though not always by the full amount. Wholesale funding costs, competition and deposit flows shape what lenders can offer, lenders price in expected inflation, and a borrower with higher credit risk usually pays more. Each lender then adds a margin to cover profit and operating costs, with fees on top.

Contracts define their own rates too. A default or penalty rate is a higher rate applied when repayments are missed, a change-of-rate clause explains when and how a lender can vary a variable rate, and the effective date says when a new rate applies, which matters for notice periods. The definitions section of a contract shows how the word rate is being used.

Compare like for like: the same loan amount, term and repayment frequency. For loans, check the comparison rate, confirm whether the rate is fixed or variable and how long any fixed term runs, note the compounding frequency, and add up establishment, ongoing and early termination fees. Offset accounts, redraw and packaging can reduce the interest payable, and a repayment calculator shows total interest over the term.

For savings, ask about access features such as withdrawal limits and notice periods, and whether the rate is introductory. A business comparing a business loan can model scenarios over realistic cash flows before choosing. Council rates are a different thing altogether: recurring local government charges on property, based on valuation or rateable value, billed annually or quarterly, which belong in a home ownership budget alongside repayments, insurance and utilities.