What is a comparison rate, and when can you trust it?

When a lender advertises an interest rate, the National Credit Code makes the ad carry a comparison rate as well. The idea is simple. A loan can look cheap on its headline rate and claw the money back through fees. The comparison rate blocks that trick by folding the main fees into the rate itself.

How the number is built

The calculation takes the amount borrowed, the repayments, and every fee the lender can name in advance. Application fees, valuation fees, settlement fees and ongoing service fees all go in. Then the formula asks one question. What single interest rate would produce this total stream of payments? That rate is the comparison rate. ASIC's Moneysmart glossary calls it the interest rate plus most fees and charges, reduced to a single percentage figure.

Take a made-up loan at 5.99 per cent with no fees at all: its comparison rate is also 5.99 per cent. Add a $600 application fee and a $10 monthly fee, and the figure moves to about 6.14. The gap between the two numbers is the fee load, converted into interest.

The $150,000 assumption

Now the part most bank pages skip. Regulation 97 of the National Consumer Credit Protection Regulations 2010 fixes the example behind every advertised comparison rate. For home loans, it is $150,000 over 25 years. That is why the same fine print sits under every home loan ad in the country.

Size matters because fees do not scale with the loan. A $395 annual package fee spread over $150,000 adds roughly 0.26 percentage points. The same fee spread over $600,000 adds about 0.07. On the mandated example, a fixed fee weighs almost four times more than it does on a typical loan. So the published figure punishes fee-heavy loans hard, whether or not the fee would matter at your size.

A worked example where the ranking flips

Two invented loans show how far this can go. The sums below use the standard amortisation formula and are illustrative only.

Loan A charges 5.89 per cent with a $395 annual package fee. Loan B charges 6.03 per cent with one $600 upfront fee and nothing ongoing.

On the legal basis of $150,000 over 25 years, Loan A's comparison rate lands near 6.26 per cent and Loan B's near 6.07. B looks clearly cheaper, and a ranking by comparison rate puts it on top by a wide margin.

Now run the same two loans at $600,000 over 30 years. Loan A's lower rate saves about $840 in interest in the first year, while its fee costs $395. Counting every repayment and every fee, Loan A finishes about $8,000 cheaper over the life of the loan. The ranking has flipped, and nothing changed except the loan size.

Those two products are mild cases. Push the fixed fees higher, or the loan larger, and the gap between the advertised ranking and the true one widens further.

What the comparison rate leaves out

The law is upfront about the gaps. The warning printed under every ad says that costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included. In practice, four exclusions matter most.

• Government charges. Stamp duty and registration fees sit outside the calculation entirely.
• Event-based fees. Redraw fees, late payment fees and break costs on a fixed loan depend on what you do later, so a formula set at the start cannot see them.
• Cashbacks. A cashback is not a fee, so it never enters the formula. A $3,000 cashback can outweigh a small rate gap for years, and the comparison rate ignores it completely.
• Feature value. The fee for a package with an offset account is counted. The interest the offset saves you is not.

When to trust it, and when to do your own sums

The comparison rate still earns its keep in a few places. It exposes honeymoon pricing, because the calculation runs across the whole term, revert rate included. A loan with a low intro rate and a high ongoing rate shows an ugly comparison rate, which is exactly the warning you want. It also works as a quick first filter between plain loans of a similar size. And it is closest to honest when your balance actually sits near $150,000.

Do your own arithmetic when your loan is well above the legal example, when a big fixed fee or a cashback is in play, or when an offset matters to you. The sums are short. Multiply the rate gap by your balance to get the yearly interest difference, then weigh the fees against it. A gap of 0.10 percentage points on $700,000 is about $700 a year. A repayment calculator does the rest.

Most borrowers have help at hand anyway. Mortgage brokers settled 81.0 per cent of new residential home loans in the March 2026 quarter, on MFAA figures, and how they find clients is a story of its own. Ask yours to show the total cost of each shortlisted loan at your real balance over the first five years. That one table beats every advertised number on the page.

Seek Mortgages is an independent publication. We do not sell loans, take enquiries or give personal advice, and a decision this size deserves a licensed broker or adviser across the details. What we can show you is how the number under the ad is built, and the loan size the law bakes into it.

The short version

Treat the comparison rate as a fee detector, and a good one. Read it to catch honeymoon rates and hidden ongoing charges. Lean on it less as your loan grows past the legal example, because at $600,000 the ranking it implies can be exactly backwards. Cashback offers and package pricing show up most on prime home loans, where the same arithmetic applies.

Common questions