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What is a comparison rate on a home loan?
A comparison rate combines a loan's interest rate with most fees and charges you must pay. It shows these costs as a percentage for one example loan. This helps you compare loans on the same basis. It is not the rate charged on your debt. It leaves out some costs and may not fit your loan.
Updated
Why are lenders required to show a comparison rate?
The National Credit Code, a law for consumer loans, requires it in certain ads that quote an interest rate. The rule applies to credit with a fixed term. Showing just the interest rate can hide fees you must pay at the start or along the way.
The comparison rate turns the known interest and fees into one cost percentage. A fixed term means the loan has an agreed time for repayment. It does not mean the interest rate is fixed. Loans with a rate that can change can also fall under this rule.
What does the standard mortgage example actually mean?
The rules set loan amounts and terms to use in ads. They include $150,000 over 25 years for home loans. That is a basis for the sums. It is not a typical loan size or a suggested term for you.
A fixed fee takes a larger share of a small loan than a large one. Changing the amount or time to repay changes the comparison rate. A Key Facts Sheet is a lender's summary of loan costs. It can show the costs for your own amount, term and way of repaying.
Which costs and features are missing from a comparison rate?
The rate leaves out government fees and duties. It also excludes charges that only arise when you do something, such as pay out early or redraw money. These are called contingent charges. Possible fee waivers, where a fee may be dropped, can be left out too.
The figure does not tell you whether an offset account or flexible payments suit your needs. An offset holds cash beside a loan to cut interest. Loans with close comparison rates can allow different features and have different fees later on.
Illustrative example4 steps
An annual fee means two matching interest rates can cost differently
- Assume two loans have the same balance, term and interest charge.
- Loan A has no annual fee; Loan B charges an assumed $300 each year.
- Over 4 years, Loan B's annual fees total $300 multiplied by 4 = $1,200.
- A comparison rate can reflect this known fee even though the advertised interest rates match.
For investors
An advertised cost percentage cannot describe a lending structure.
Investors may compare loans with an interest-only phase, offset accounts or different homes used to back the debt. The comparison rate gives one view of cost. It does not show how these terms affect spare cash or the property at risk. Payments on an interest-only loan also change when that phase ends. A lower rate in an ad does not settle those details.
Common questions
Questions about comparison rate
Keep learning
Property is a complex world.
Comparison rate is one piece of it. Lending rules decide how much you can borrow, and how soon you can buy again. Next, read about mortgage broker, refinancing and offset account.
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