A comparison rate combines a loan’s interest rate with specified fees into one annual percentage, using a prescribed calculation under Australian credit law. It is accurate only for the loan amount and term stated with the advertisement.
What a Comparison Rate Shows
A home loan comparison rate shows how specified loan fees affect the advertised cost of borrowing. The same meaning applies when an advertisement calls it a mortgage comparison rate. It helps you compare similar loans when a low interest rate comes with higher fees.
Moneysmart’s comparison rate definition describes the interest rate and most loan fees reduced to a single percentage. The figure still applies to an example, so it cannot tell you every dollar you will pay.
The Standard Loan Examples Behind the Figure
The standard home-loan example is a secured loan of $150,000 over 25 years. For an unsecured loan, an advertised example is $30,000 over 5 years.
Regulation 97 of the National Consumer Credit Protection Regulations 2010 prescribes those amount-and-term pairs among several examples. The relevant example depends on the credit product advertised. For a $30,000 example, the advertisement must say whether the calculation assumes a secured or unsecured loan.
A car-finance comparison rate commonly uses a $30,000 secured loan over five years, unlike the $150,000, 25-year home-loan example. The security, amount and term belong to the advertised calculation.
Your borrowing amount changes the effect of fixed fees. In a hypothetical example, a $300 annual fee equals 0.20% of a $150,000 starting balance and 0.05% of a $600,000 starting balance. Those percentages illustrate the fee’s relative size. They are not comparison rates, which also account for repayments over the term.
A shorter term also spreads an establishment fee across fewer years. Model your actual loan amount and term before treating an advertised comparison rate as your own cost.
The Warning Every Comparison Rate Carries
An advertised comparison rate must carry a warning that limits it to the stated example. Regulation 99 permits a short statement or a long statement. Its exact short statement is:
WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
The first sentence means the number describes the advertised scenario and leaves some costs out. The second means a different loan amount, term or fee arrangement can change the result.
The warning must be given immediately after the comparison rate, under regulation 71(13). It can appear with the explanation of the loan amount and term used. For print or spoken advertising, it must use the same form as the comparison rate. When an online advertisement displays the comparison rate in text, it must also display the warning in text.
Sections 163 and 164 of the National Credit Code set these advertising requirements alongside regulation 99. The comparison rate itself must be at least as prominent as the advertised interest rate or repayment amount.
Comparison Rate vs Interest Rate
The interest rate is the percentage charged on the outstanding loan balance. The comparison rate adds specified fees through the prescribed calculation.
Two loans can have the same interest rate and different comparison rates because their included fees differ. Fixed and variable rates follow the same distinction, as do personal loans where comparison rates apply. When the example term extends beyond the fixed period and the loan reverts to another rate, the comparison rate uses that rate for the remaining repayments in the example. The gap between a fixed rate and its comparison rate can therefore reflect the revert rate as well as fees.
Use the actual interest rate to work out principal-and-interest repayments. Add the applicable fees separately when modelling your own costs. Using the comparison rate as the repayment rate can count included fees twice.
What the Comparison Rate Includes and Leaves Out
The comparison rate includes the advertised interest rate and ascertainable credit fees required by the prescribed calculation. Fees covered by this calculation can be:
- Establishment or application fees.
- Ongoing account or service fees.
- Other prescribed credit charges known when the comparison rate is disclosed.
Regulation 100 excludes government fees, charges and duties from the calculation. Section 166 of the National Credit Code also excludes fees whose imposition or amount depends on an event that might never happen.
The following costs and savings sit outside the figure:
- Government charges, such as mortgage registration fees.
- Fees for optional features that depend on whether you choose or use them.
- Early repayment or fixed-rate break costs triggered by ending or changing a loan early.
- Redraw fees triggered when you withdraw extra repayments.
- Cost savings from fee waivers.
Hypothetically, a 1.88% comparison rate means an annualised cost of 1.88% under the stated example and included-fee assumptions. It does not quote your repayment interest rate or promise that rate on your chosen loan.
The same reading applies to an illustrative 0%, 0.88% or 1.99% comparison-rate label. A zero label means the prescribed calculation returns zero under its assumptions. Excluded charges can still apply.
Read the stated amount, term, fees and warning before comparing these labels. These examples explain the figures and do not identify offers available today.
A compulsory ongoing fee does not become excluded just because the loan also has optional features. Read the actual fee schedule alongside the advertised calculation.
How to Use Comparison Rates
Use comparison rates to screen similar loans, then compare the costs for your own borrowing scenario.
- Confirm both advertisements use the same loan amount and term. Check whether each example is secured or unsecured.
- List your actual interest rate and every applicable fee. Separate compulsory fees from costs triggered by how you use the loan.
- Calculate repayments and total costs using your intended loan amount and term. Include an earlier exit if that is your likely plan.
- Compare features that change your use of the loan, such as an offset account, redraw or extra-repayment limits.
A lower comparison rate does not prove a loan is suitable. Choose using the contract, repayment structure and your requirements, with the advertised figure as one input.
