Comparison Rates Decoded: What Lenders Don't Tell You

When shopping for a home loan, you'll encounter two rates: the advertised interest rate and the comparison rate. Understanding the difference—and knowing what's hidden even in comparison rates—is crucial for making an informed decision.

What Is a Comparison Rate?

The comparison rate is a single percentage figure designed to help you identify the true cost of a loan. It combines the interest rate with most fees and charges into one number for easier comparison.

The Legal Requirement

Under the National Consumer Credit Protection Act 2009, lenders must display a comparison rate alongside any advertised interest rate. This was introduced to prevent lenders from advertising artificially low rates while burying costs in fees.

How It's Calculated

The comparison rate is calculated based on a standardized loan:

• Loan amount: $150,000
• Loan term: 25 years
• Repayment type: Principal and interest

This standardization allows you to compare "apples with apples" across different lenders—at least in theory.

The Gap Between Advertised and Comparison Rates

What's Included in Comparison Rates

Fees typically included:

• Application/establishment fees
• Monthly or annual account fees
• Settlement fees
• Documentation fees
• Valuation fees (if standard)

What's NOT Included

Significant costs often excluded:

• Lenders Mortgage Insurance (LMI)
• Government charges (stamp duty, registration)
• Legal and conveyancing costs
• Discharge fees when you leave
• Break costs for fixed rate loans
• Offset account fees (sometimes)
• Redraw fees
• Valuation fees beyond the first

This means the comparison rate still understates your true cost.

Why the Standard Calculation Can Mislead You

The $150,000 Problem

The comparison rate is calculated on $150,000—but the average Australian home loan is now over $600,000. This matters because:

Fixed costs spread differently:

• $1,000 establishment fee on $150,000 = 0.67% of loan
• $1,000 establishment fee on $600,000 = 0.17% of loan

Impact on comparison rate:

• At $150,000: Fees have significant impact on comparison rate
• At $600,000: Same fees have much smaller impact
• Your actual cost is different from the comparison rate calculation

The 25-Year Assumption

Many borrowers don't keep loans for 25 years:

• Average loan life: 4-5 years before refinancing or selling
• Establishment fees have bigger impact on shorter loans
• Ongoing annual fees become more significant

Real-World Example

Loan A:

• Interest rate: 5.99%
• Comparison rate: 6.15%
• Annual fee: $395
• Establishment fee: $600

Loan B:

• Interest rate: 6.09%
• Comparison rate: 6.11%
• Annual fee: $0
• Establishment fee: $0

On the comparison rate, Loan A appears better. But on a $600,000 loan held for 5 years:

• Loan A total fees: $2,575 + slightly lower interest
• Loan B total fees: $0 + slightly higher interest
• Loan B may actually cost less

Reading Between the Lines

The "From" Trap

Watch for marketing language:

• "Rates from 5.99%" = Only available to select customers
• "Comparison rate from 6.15%" = You probably won't get this

To qualify for the lowest rate, you typically need:

• Large deposit (20%+)
• Strong credit history
• High income
• Large loan size
• Package deal purchase

Package Deal Confusion

Package deals bundle multiple products:

• Home loan
• Credit card
• Transaction account
• Insurance products

The comparison rate shows the loan cost, but:

• Doesn't reflect value of bundled products
• May not account for package fee accurately
• Could include discounted rates that expire

Honeymoon Rate Reality

Some comparison rates are calculated on introductory rates:

• First 12 months: 5.49%
• Then reverts to: 6.29%
• Comparison rate shown might be blended

Always ask:

• What rate applies after the introductory period?
• Is the comparison rate based on the ongoing rate?
• What's the comparison rate at the full rate?

A Better Way to Compare Home Loans

Step 1: Calculate Your True Comparison

Use your actual loan details:

• Your loan amount: E.g., $500,000
• Your likely holding period: E.g., 5 years
• Your LVR and circumstances: Determines actual rate offered

Step 2: Request Personalized Quotes

Don't rely on advertised rates. Request quotes that include:

• The actual rate you'll receive based on your situation
• All applicable fees listed individually
• The total cost over your expected holding period
• Comparison to their standard variable rate

Step 3: Do the Math Yourself

Total cost calculation:

Year 1-5 interest at your rate: $______ Establishment fees: $______ Annual fees × 5: $______ Estimated discharge fee: $______ Any other fees: $______ Total 5-year cost: $______

Step 4: Consider Non-Rate Factors

The cheapest loan isn't always the best:

• Flexibility: Can you make extra repayments without fees?
• Features: Offset account, redraw, split options?
• Service: Online functionality, support quality?
• Stability: Will rates stay competitive long-term?

Red Flags to Watch For

Unusually Low Comparison Rates

If a comparison rate seems too good to be true:

• Check the fine print for limited eligibility
• Look for introductory rate periods
• Ask about fees not included in the calculation
• Consider the lender's reputation and stability

Large Gap Between Rates

A big difference between advertised and comparison rates indicates:

• High fees built into the loan
• Significant ongoing charges
• Potentially expensive features included

Example:

• Advertised rate: 5.79%
• Comparison rate: 6.45%
• Gap of 0.66%: Significant fee loading

Missing or Hard-to-Find Information

Reputable lenders display comparison rates clearly. Be wary if:

• Comparison rate isn't shown prominently
• You have to search hard to find fee information
• Staff can't easily explain the rate structure
• Terms and conditions are overly complex

Questions to Ask Every Lender

1. "What comparison rate would apply to my specific situation?" (Based on your loan amount, LVR, and circumstances)

2. "What fees are NOT included in the comparison rate calculation?" (To understand your true total cost)

3. "What will my rate be after any introductory period?" (To avoid honeymoon rate surprises)

4. "Can you provide a total cost estimate for my expected loan term?" (5-7 years is more realistic than 25)

5. "Are there any conditions that could change my rate?" (Such as maintaining certain account balances or product bundles)

The Professional Advantage

Mortgage brokers have tools that calculate true loan costs across multiple lenders simultaneously, accounting for:

• Your actual loan amount and term
• All applicable fees (including those excluded from comparison rates)
• Your specific circumstances and eligibility
• Real rates offered (not just advertised rates)

This provides a more accurate comparison than relying on standardized comparison rates alone.

Key Takeaways

1. Comparison rates are helpful but imperfect—they provide a starting point, not the final answer

2. Your true cost will differ from the standardized $150,000/25-year calculation

3. Hidden fees exist even beyond the comparison rate

4. Do your own math using your actual loan details and expected holding period

5. Consider the complete picture—rate is important but so are features, flexibility, and service

6. Get professional advice for a thorough comparison across multiple lenders

Ready for a True Comparison?

At Ding Financial, we go beyond comparison rates to calculate your actual cost across 30+ lenders. Our detailed analysis considers your specific situation and reveals the true cost of each option.

Contact us for a comprehensive home loan comparison that shows you what comparison rates don't.