What Is a Comparison Rate?

A home loan comparison rate is the actual cost of the loan. Lenders are legally required to provide buyers with this rate so they can compare mortgages accurately. Understanding what goes into one is an important piece of the homeownership puzzle.

What does ‘comparison rate’ mean?

A comparison rate gives you a clearer picture of how much your mortgage costs beyond just the interest you pay. It includes all mandatory fees, charges and interest on the loan and is displayed as a percentage. For example, the interest rate on your loan might be 7.92%, but the comparison rate could be 8.27%.

In Australia, lenders must provide comparison rates alongside interest rates. So, make sure you receive one when shopping for a home loan. You can then use this rate to compare different mortgage offerings before you sign.

Comparison rate vs home loan interest rate

A comparison rate includes all mandatory fees and costs associated with the loan, while the interest rate refers only to the interest you pay on the loan’s principal.

As of September 2023, the average principal-and-interest home loan interest rate was 5.95%, according to the Reserve Bank of Australia. But this number does not include everything you’ll need to pay the lender — this is where the comparison rate comes in.

The comparison rate includes the home loan’s interest rate plus any other fees or charges required by the lender that would raise the cost of the loan.

There shouldn’t be a large discrepancy between the two if the fees are reasonable. If the comparison rate is several percentage points higher than the interest rate, ask the lender for a breakdown of the costs.

How is a comparison rate calculated?

A comparison rate sums up the costs of interest payments as well as fees and charges associated with your mortgage, which may include:

set-up or establishment fees
account-keeping fees
annual fees
other ongoing lender fees.

Comparison rates don’t typically contain:

stamp duty
mortgage registration and any other government fees
any late fees or charges that could be applied in the future, such as early repayment or redraw fees.

In general, comparison rates only ever include fees you’re absolutely required to pay.

Comparing comparison rates

Comparison rates can help you weigh the pros and cons of respective mortgages. Before the advent of comparison rates, banks could offer deceptively low interest rates but exorbitant fees and charges.

With a fuller, three-dimensional picture of your loan’s composition, you can now compare lender products with far greater confidence. Interest rates may get all the media attention, but comparison rates are every bit as important for a first-home buyer.

Fees differ among banks, but not by much

Two vendors with identical interest rates may have different comparison rates due to higher ongoing account fees or higher establishment fees, for example.

These added costs should only make a small difference, so comparison rates should not deviate wildly between the major lenders. If you’re quoted a very high comparison rate, ask the lender for a breakdown of the costs. Get a quote from a different lender and compare the rates. You may find that another lender offers the same interest rate but with lower fees.

Use the same criteria when comparing

Some fees are flat rates, such as $10 or $30 a month. Depending on the size of your loan, these fees can affect comparison rates differently. For example, a $30 monthly fee on a $100,000 loan can raise the comparison rate by more percentage points than a $400,000 loan.

Therefore, it’s important to compare mortgages with the exact same criteria, such as long amount, term length and interest rate, to compare most accurately.

Don’t be scared to ask questions

Above all else, a comparison rate should reveal anything that’s murky or misunderstood in your mortgage arrangement. You can always ask your lender to disclose all of the components of its rate. Shop around for the rate that best suits your personal investment strategy. Remember that knowledge is power, and understanding this figure means you can, at least, discuss with your lender potential reductions in fees and charges or a loan structure that better suits you

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Alan Hartstein

Alan Hartstein has worked in publishing for over 25 years as a writer and editor across broadsheets, tabloids, magazines, trade publications and numerous forms of digital content. Alan was initially…

Georgia Rose

Georgia Rose is a lead writer on the international team at NerdWallet. Her work has been featured in The Washington Post, The New York Times, The Independent and The Associated…