What is a Home Loan Comparison Rate?

While Home Loans can be like a rough map for that journey, comparison rates can be like a compass when you’re deep in the fog. A Home Loan comparison rate is a percentage that, in theory, shows you the total cost of a Home Loan taking into account interest rates as well as any other fees and charges. It acts as an overview to give a true account of what your loan is, compared to the interest rate. 

By law, lenders have to show you the comparison rate.¹ASIC – National Credit Code This was made a legal requirement to try and stop lenders from advertising low interest rate loans that end up costing borrowers much more in the long run due to all the extra fees and charges. 

Your individual situation might also come with other fees and charges that aren’t shown in the comparison rate. 

How are Comparison Rates calculated? 

So let’s break things down a bit. Comparison rates are calculated using these three factors: 

• A loan of $150,000. 
• A loan period/term/lifetime cost of 25 years. 
• A principal and interest loan. 

You can probably spot the first problem right? 

This calculation doesn’t realistically reflect the market today. A typical Home Loan is usually closer to $600,000  or more and a typical loan term is 30 years, not 25 years. They also don’t take into account any other features, such as interest only loans, offset accounts, or redraw facilities. 

Let’s say you’re on this home hunting journey. You’ve only a few gold pieces in your cloak and you can still smell last night’s ale from that tavern in the last village. On the road, you come across two lenders: one advertising a 5.5% interest rate on Home Loans with $20 per month in account keeping fees and a $400 annual fee. The other lender advertises a 5.6% interest rate with no monthly or annual fees. If you only look at interest rates, the first lender should be cheaper. 

However, if you consider all the other associated fees, the second lender with a higher interest rate might end up being cheaper.  

Another important thing to remember is that a comparison rate doesn’t take into account your loan size, but those fees are expressed as a percentage of the principal. The amount of interest you pay changes with the size of the principal but set fees don’t.  

A $500,000 loan with an interest rate of 5.5% and an extra $1,000 in additional fees every year will not have the same comparison rate as a $100,000 loan with the same interest rate and fees because it’s expressed as a percentage. $1,000 is only 0.02% of $500,000, but that same $1,000 is 1% of $100,000. Same fees and interest rates, different loan amounts, different comparison rates. 

Whew! We know that’s a lot of numbers but trust us, they’re all part of the journey. 

How fees can impact a comparison rate 

To get an accurate picture of your Home Loan costs, it can be more helpful to use a repayment calculator like iSelect’s mortgage repayment calculator. 

What’s the difference between a comparison rate and an interest rate? 

The interest rate is the percentage you get charged on the amount of money you borrow. The comparison rate is designed to reflect the ‘true cost’ of the loan, taking into account fees and charges as well as the interest rate. It’s like if a wizard offers you a magic scroll with no terms and conditions. Probably best if you do your research. 

What don’t comparison rates include? 

It’s important to remember that comparison rates only include the regular fees and payments of a loan, assuming you stay with that same loan the whole time. They don’t have to include costs associated with refinancing or changing your loan, nor do they have to include other costs associated with buying a property.  

In most cases, at least one or more of these factors will affect the type of Home Loan you choose, and your ability to pay it off.

Helpful tip:

Comparison rates can become even more misleading when it comes to fixed rate loans because they’re calculated with the assumption that you’ll revert to the variable rate after your fixed term finishes. In reality, most borrowers will consider refinancing to a better deal when their fixed rate finishes.

Debbie Shankar

Group Content Manager, Lendi

What happens if my comparison rates change? 

Interest rates can change and fees can change. That means comparison rates can change too. If you notice your comparison rate is going down, that means the overall cost of your loan is going down, even if your interest rate hasn’t changed.  

It could be a good opportunity for you to take advantage of lower rates and fees and pay off more of your loan. If your comparison rate is staying high relative to other comparison rates, it might be time to consider refinancing. Which is a whole other part of your home hunting journey. 

Where can I find and compare Home Loans? 

At iSelect we’ve partnered with Lendi to make it easier to find a great deal on your Home Loan.* Click here to get started comparing from a range of lenders online.