The comparison rate is an Australian legal requirement, mandated by ASIC under the National Consumer Credit Protection Act, designed to help borrowers understand the true cost of a loan beyond its advertised interest rate. It incorporates the interest rate plus most mandatory fees and charges, expressed as a single annual percentage rate. But the comparison rate has significant limitations — and relying on it exclusively can lead to poor borrowing decisions.
What a Comparison Rate Is and How It Is Calculated
The comparison rate is calculated using a standardised formula applied to a hypothetical $150,000 loan over 25 years. This means every comparison rate you see from Australian lenders is calculated on the same theoretical loan — making lenders directly comparable in theory. The rate includes the advertised interest rate plus upfront establishment fees, monthly account keeping fees, and annual fees.
For example: a loan with a 5.9% interest rate and a $300 annual fee would have a comparison rate higher than 5.9% — the additional cost of the annual fee, spread over the loan term and expressed as an interest rate, adds to the advertised rate. The comparison rate allows you to identify loans where a low headline rate is offset by high fees.
The Warning Statement Is There for a Reason
ASIC requires lenders to include this warning alongside every comparison rate: 'Warning: The comparison rate is true only for the examples given and may not include all fees and charges. Different amounts and terms will result in different comparison rates.' This statement exists because the 25-year/$150,000 benchmark rarely reflects real loan scenarios.
What the Comparison Rate Does Not Include
The comparison rate excludes several costs and features that are significant in real-world loan decisions. It does not include: offset account fees (many competitive variable rate loans charge $10–$20 per month for offset functionality); government charges such as stamp duty on the mortgage registration; break costs on fixed rate loans; redraw fees; late payment fees; or the value of features like unlimited extra repayments.
Critically, the comparison rate is calculated assuming the full loan amount ($150,000) is outstanding for the full term (25 years). If you make extra repayments — which many borrowers do — or use an offset account to reduce the effective balance, your actual cost of credit will be substantially lower than the comparison rate suggests. The comparison rate is a worst-case measure, not a real-life cost estimate.
- ✓Offset account fees (not included)
- ✓Fixed rate break costs (not included)
- ✓Government registration charges (not included)
- ✓Discharge fees (not included)
- ✓The value of extra repayment flexibility (not included)
- ✓Package annual fees (sometimes included, sometimes not — check the fine print)
How to Use Comparison Rates to Make Better Decisions
Use comparison rates as a first filter, not the final decision. When comparing two variable rate loans with similar features and no offset account, the comparison rate is a reasonable shortcut for identifying which has the lower total cost. When comparing loans with different features — particularly when one has an offset account and one does not — the comparison rate becomes less useful.
The most reliable approach is to: (1) shortlist loans with the features you need (offset, redraw, extra repayments); (2) compare interest rates within that shortlist; (3) add annual fees and monthly fees as dollar amounts; (4) assess the value of offset and extra repayment flexibility based on your anticipated savings and repayment behaviour. A mortgage broker can perform this comparison across a lender panel to identify the genuinely lowest-cost option for your specific circumstances.
Ask for the Full Fee Schedule
Before committing to any home loan, ask the lender for a full fee schedule that includes all fees charged over the life of the loan. This is more useful than the comparison rate alone. Pay particular attention to: annual package fee, offset account fee, discharge fee and redraw fees — these are often not captured in the comparison rate.
Frequently Asked Questions
About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.