U
Understand
Interest rate vs comparison rate — what each one tells you
The real issue
Lenders advertise the lowest number they can legally lead with — the interest rate. The comparison rate is always higher and always more accurate as a cost indicator. A lender with a 6.00% interest rate and a 6.85% comparison rate is more expensive than a lender with a 6.20% interest rate and a 6.30% comparison rate — because the fees on the first loan are substantially higher. Most borrowers compare interest rates. The ones who understand comparison rates make better decisions.
| Concept | What it is | What it tells you |
|---|---|---|
| Interest rate (p.a.) | The annual percentage cost of borrowing the principal | Base cost only — does not include fees or charges |
| Comparison rate (p.a.) | Interest rate + most standard fees, expressed as a single annual % | More complete cost picture — use this to compare across lenders |
| Gap between the two | The difference between the two rates | The larger the gap, the more fees the lender is charging. A 0.8%+ gap warrants scrutiny. |
The standard calculation (AU NCCPA): All AU comparison rates are calculated on a $150,000 secured loan over 25 years. This is a regulated standard that makes rates comparable across lenders — but it means the comparison rate may not accurately reflect your actual loan if your amount or term differs significantly. Larger loans and shorter terms reduce the per-dollar impact of fees, making the comparison rate appear lower relative to reality.
H
What's not included
Costs the comparison rate doesn't capture
The comparison rate catches most standard recurring fees — but it deliberately excludes several cost categories that can materially affect your total loan cost. Know what's missing before you rely on it.
| Not included in comparison rate | Why it matters |
|---|---|
| Government charges (stamp duty, LMI if applicable, title registration) | These are external costs that vary by state and loan size — not lender fees. But they can add thousands to your upfront cost. |
| Break costs / early repayment fees on fixed loans | If you sell, refinance, or pay out a fixed loan early, break costs can be substantial — sometimes tens of thousands on large loans. |
| Redraw or offset fees (on some products) | Some lenders charge to use redraw. An offset account with fees may not deliver the interest saving you expect. |
| Rate lock fees (fixed loans) | Charged to hold a rate while your loan is processed — varies from $0 to $750+. |
| Conditional or discretionary charges | Late payment fees, paper statement fees, over-limit fees. Not included because they depend on your behaviour. |
| Insurance products attached to loan | Mortgage protection insurance, loan protection — often added at settlement. Not part of the comparison rate calculation. |
Break costs on fixed loans can be very large. If your fixed rate is 5.5% and market rates drop to 4.5%, the lender's "loss" on your contract is the difference × remaining term × loan balance. On a $500,000 loan with 3 years remaining, this can exceed $15,000. Ask for a break cost estimate before fixing.
C
Compare
How to compare loan offers on a like-for-like basis
The comparison rate standard only works if you're comparing equivalent products. A comparison rate on a variable loan tells you nothing useful about a fixed loan from the same lender — they are different products with different risk profiles.
| Step | What to do |
|---|---|
| 1. Separate variable from fixed | Compare variable loans with variable loans. Fixed-rate comparison rates don't capture break costs, making them misleading for long-term comparison. |
| 2. Compare on the same loan amount and term | For your own loan, ask each lender for a Key Facts Sheet — required under NCCPA for personal loans, shows total cost of credit for your actual amount and term. |
| 3. Check the gap | Interest rate vs comparison rate gap above 0.5–0.7% on a standard home loan warrants a fee itemisation request. Ask: "What fees are included in your comparison rate calculation?" |
| 4. Request a full fee schedule | Application fee, ongoing monthly fee, annual fee, redraw fee, early repayment fee, discharge fee. Total these across your expected loan term. |
| 5. Calculate total cost of credit | Monthly repayment × number of repayments + all fees = total cost. Compare this number, not just the rate. Most loan calculators will produce this. |
MoneySmart loan calculator (ASIC): moneysmart.gov.au/borrowing-and-credit/home-loans/mortgage-calculator — allows you to enter your actual loan amount, term, and rate to produce a true total cost figure. Use this to compare at least three lenders before committing.
Q
Questions to ask
Before you sign — what to ask every lender
| Question | Why it matters |
|---|---|
| "What fees are included in your comparison rate — and what's excluded?" | Forces the lender to disclose the full fee structure. Any hesitation is a signal. |
| "What is the total amount I will repay over the full loan term?" | The single most honest number. Comparison rates are percentages — this is dollars. |
| "What are the break costs if I refinance or sell in 3 years?" | Critical for fixed loans. Get a written estimate for a realistic scenario. |
| "Is there a redraw facility, and is there a fee to use it?" | Redraw fees on a variable loan significantly reduce the value of extra repayments. |
| "Will this rate change — and under what conditions?" | Variable rates can be changed at any time. Understand whether your rate is a discount off the standard variable rate (SVR) — because if the SVR rises, your rate rises too. |
| "What is the discharge fee when the loan is fully paid?" | Ranges from $0 to $500+. A small but real cost at the end of the loan. |
You are entitled to a Credit Guide and a Quote. Under the NCCPA, any Australian credit licensee must give you a Credit Guide before providing credit assistance. A Credit Quote must show all fees and charges. Ask for both in writing before proceeding with any lender.