What is a comparison rate?
A comparison rate is the true annual cost of a loan, expressed as a single percentage that folds the interest rate together with most fees and charges. An advertised interest rate can be set low to draw you toward a product; the comparison rate sits beside it to give a more realistic picture of what the loan actually costs, and to let you weigh one loan against another on the same basis.
This is not a courtesy. The comparison rate is required by law to accompany every advertised interest rate in consumer-facing material, and brokers are obliged to discuss it with you. Part 10 of the National Consumer Credit Protection Act 2009 contains the governing legislation, and ASIC sets out the comparison rate rules in more detail.
How a comparison rate is calculated
The comparison rate is built from the cost elements that you carry across the life of the loan, not just the headline interest rate. The inputs that feed into it include:
- the loan amount, loan term and repayment frequency
- the interest rate
- upfront fees — establishment, valuation, mortgage documentation and settlement fees
- ongoing fees — monthly account fees and annual package fees
- discharge fees payable when the loan ends
Bundle those together and you get a rate that reflects the real annual cost rather than the advertised one.
Why comparison rates matter — and where they mislead
The loan with the lowest interest rate is not always the cheapest loan. A lender can advertise a sharp rate and recover it through high fees, while a slightly higher rate carries lower fees and ends up the better deal. Comparing the comparison rates side by side is the more honest read on true cost — and it is why a product that looks more expensive on the headline number can be the more appropriate one once the full cost is on the table.
But the comparison rate has real limits, and they are worth understanding before you lean on it too hard:
- It runs on a fixed benchmark. Comparison rates are typically calculated on a $150,000 secured loan over a 25-year term. Most real loans are nothing like that — the average loan now sits above $500,000, and with sound debt-reduction it is often repaid in well under 25 years. The benchmark does not reflect your amount, your term, or how your loan is structured.
- There is no "standard" comparison rate. Because the figure depends on the amount borrowed and the time taken to repay it, every credit product has a range of comparison rates, not one. Change the loan size or the term and the number moves.
- It excludes a long list of costs. A comparison rate does not capture government fees and charges, stamp duty, conveyancing, break costs and early termination fees, deferred establishment fees, redraw fees or late payment fees. Optional features that attract extra fees sit outside it too.
- It only measures cost. It says nothing about the things that can make a loan more useful to you — fee-free accounts, flexible repayments, offset and redraw — which often matter more to the outcome than a few basis points of headline rate.
How to read the rate, and the market behind it
When you line up published interest rates across lenders, they tend to look flat and consistent — that is the number banks use to compete with each other, and it is the one people fixate on when they walk into a branch. The comparison rate tells a different story. It frequently shows that the lowest published rate does not deliver the lowest true cost, because the fees underneath it pull the real figure in another direction.
There is a broader signal here too. APRA reports aggregated lending-rate data to the RBA each quarter, covering owner-occupier principal-and-interest, existing owner-occupier loans, and investment principal-and-interest, measured against the cash rate. That data consistently shows existing borrowers paying more than the rates currently on offer — a clear, recurring argument for reviewing and refinancing rather than letting an old loan drift. Many people are simply not borrowing at the lowest rates actually published.
The comparison rate is a useful comparison tool, not a verdict on which loan suits you. The right structure depends on your loan size, your term, the features you will actually use, and how the borrowing fits the rest of your plan. That is the work worth doing properly — sorting which products genuinely fit your circumstances rather than chasing the lowest headline number.
Book a strategy session and we will work through the products that fit your circumstances.
General information only — not personal financial product or credit advice. Lending is subject to each lender's policy, your full circumstances and responsible-lending assessment. AeFin is an Australian Credit Representative (CR 464548) of Finsure (ACL 384704).