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How to Read a Comparison Rate: What Banks Don’t Explain About Home Loan Costs

Every home loan advertisement in Australia must show two numbers: the advertised interest rate and the comparison rate. Most borrowers understand the comparison rate is supposed to show the “true” cost of the loan. But fewer understand how it is calculated, what it leaves out, and why it can be actively misleading for a typical 2026 mortgage.

What Is a Comparison Rate and Why Does It Exist?

The comparison rate is a single annual percentage figure that combines a loan’s interest rate with most of its standard fees and charges. Its purpose is to give borrowers a clearer picture of the true cost of a loan, making it easier to compare products on a like-for-like basis.

Comparison rates were introduced in Australia under the Uniform Consumer Credit Code in 1994 and are now governed by the National Consumer Credit Protection Act (NCCP Act) and the National Credit Code. All lenders are legally required to display a comparison rate alongside any advertised interest rate for consumer credit products. The formula is standardised — every lender uses the same calculation, which is what theoretically allows you to compare loans from different providers on an equal footing.

How the Comparison Rate Is Calculated — and the Core Problem

By law, the comparison rate must be calculated on a specific standard loan scenario:

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

The calculation takes that $150,000 loan over 25 years and adds the impact of the lender’s standard fees — establishment fees, ongoing monthly account fees, annual package fees and discharge fees — expressed as an equivalent annual interest rate.

The problem: the average new mortgage in Australia is well over $500,000. When you calculate the comparison rate on a $150,000 loan but actually take out a $750,000 loan, the comparison rate overstates the fee impact — because fixed fees have one-fifth the proportional effect on a much larger balance.

For example: a $600 establishment fee, $395 annual package fee and $350 discharge fee might add 0.20–0.25% to the effective rate on a $150,000 loan. On a $750,000 loan over 30 years, those same dollar amounts add roughly 0.04%. The advertised comparison rate overstates fee impact for most Australian borrowers. Our loan comparison guide provides a more practical framework for evaluating actual costs.

What the Comparison Rate Does Not Include

Beyond the loan size mismatch, the comparison rate excludes several costs and features that materially affect the true cost of a loan:

Offset account value — interest savings from keeping funds in a 100% offset account are not reflected in the comparison rate. A loan with a slightly higher comparison rate but a fully functional offset could be substantially cheaper in practice. See our offset accounts guide.
Government fees — stamp duty and mortgage registration fees are excluded
Conditional fees — break costs, early repayment charges and late payment fees are excluded as they may or may not be triggered
Cashback offers and rate discounts — cashback incentives are not reflected in the comparison rate
Revert rates on fixed loans — a high revert rate can make a competitive fixed loan appear expensive, even if the fixed period is exactly what you need
LMI — lenders mortgage insurance, potentially tens of thousands of dollars, is excluded

When the Comparison Rate Gets It Wrong: A Real Example

Consider two $600,000 variable rate loans:

Loan A: 5.89% interest rate / 6.15% comparison rate — no offset account, $15 monthly fee

Loan B: 5.99% interest rate / 6.05% comparison rate — full 100% offset account, no monthly fee

Loan B appears cheaper on comparison rate. But keeping $50,000 in the offset account on Loan B effectively reduces your charged balance from $600,000 to $550,000 — saving roughly $2,750 per year in interest at 5.99%. No comparison rate captures that. The loan with the lower comparison rate is not automatically the better deal.

This is one of the core reasons why working with a mortgage broker adds genuine value — a good broker models actual cost based on your numbers, not a standardised $150k scenario. See our guide to refinancing your home loan for how we approach true cost analysis and our guide to refinancing fees for a full breakdown of every cost category.

How to Actually Compare Home Loans

Use the comparison rate as a starting screen — it can flag loans with unusually high fee loads — but don’t stop there:

Start with the interest rate — the base cost of borrowing, most important on large balances
Identify all fees in dollar terms — upfront, annual and discharge
Assess features — 100% offset? Redraw? Restrictions on extra repayments?
Check the revert rate — for fixed or introductory loans, what is the variable rate it reverts to?
Calculate total cost on your actual loan amount — not $150,000

Visit our home loans page for current product options across our lender panel.

FAQ

Is the comparison rate always higher than the interest rate?

Usually yes, because it adds fees to the base rate. In rare cases for loans with very low or no fees, the two can be equal. A large gap between them indicates significant ongoing or upfront fees. A small gap typically means few additional charges — though this may also mean fewer useful features like an offset account.

Why is the comparison rate based on $150,000 over 25 years?

This was the average mortgage size in the mid-1990s when the Uniform Consumer Credit Code was introduced. It has never been updated. The average Australian home loan today is well over $500,000, which is why the comparison rate consistently overstates the fee impact for most borrowers.

Can a loan with a higher comparison rate still be the better deal?

Absolutely. A higher comparison rate loan might include a 100% offset account with significant savings potential, a lower advertised interest rate, or a cashback offer. A low comparison rate might come with limited features and a high revert rate. The comparison rate is a starting point, not a final answer.

Do I need to understand comparison rates to use a mortgage broker?

No — your broker models the true cost based on your actual loan amount, savings in offset, loan term and plans for the property. The comparison rate is one input among many. A broker can show you why two loans with similar comparison rates can have very different real costs for your specific situation.

Want Someone to Run the Real Numbers for You?

Comparison rates are a blunt instrument. At Lagos Financial, we compare home loans based on your actual loan amount, your savings, your goals and your expected holding period — not a 1990s benchmark. Book a complimentary assessment and let’s find the loan that is genuinely cheapest for your situation.