Mozo guides

What is a comparison rate and how is it calculated?

Woman looking at comparison rate bars

When shopping for a home loan, you’ve probably noticed something called a comparison rate sitting beside the interest rate. But what is the difference between the two? Why is the comparison rate important?

Let's get into what borrowers and home buyers need to know.

What is a home loan comparison rate?

The comparison rate gives you the ‘true’ cost of a loan by combining the interest rate and any additional fees or charges into a single percentage rate. This makes it easier to compare loans from different lenders.

All mortgage lenders are required by law to display the comparison rate wherever a headline rate is mentioned. This prevents them from advertising a loan as cheaper than it really is. 

While the comparison rate will contain all the main costs, it’s not all-encompassing. Other factors that might result in cost-savings — such as fee waivers, cashback deals, and the ability to make extra repayments — aren’t typically factored in.

What does the comparison rate cover?

When calculating the comparison rate, a lender will take into account the interest rate along with any unavoidable fees or charges associated with the loan. These fees can usually be broken down into three categories:

Upfront fees:

Ongoing fees:

  • Monthly or annual service fees
  • Package fees

Discharge fees:

  • Discharge admin fees
  • Document preparation fees
  • Settlement fees

What isn’t covered in the comparison rate?

There are a number of home loan costs (and potential savings) you might encounter that aren’t included in the comparison rate but will still need to be factored into your budget. These include:

Add-ons like an offset account, redraw facility, and the ability to make extra repayments, which can make a big difference to the overall cost of your loan, won’t show up in the comparison rate. This is because how you use these can’t be accurately accounted for.

How is the comparison rate calculated?

The comparison rate you see advertised is just an indication of how much a loan will cost. Importantly, lenders will make a few assumptions when calculating it, such as that the interest rate won’t change over the life of the loan.

Of course, this is unlikely in the real world. Interest rates can move up or down in response to decisions by the Reserve Bank of Australia (actual or anticipated), or simply because the bank’s cost of doing business demands it.

What’s more, when lenders calculate their comparison rates, the inputs they plug in won’t match your own, meaning the rate will only be exactly true of the example given by your lender.

For home loans, the comparison rate is typically calculated on loan amounts of $150,000 and loan terms of 25 years, with principal and interest repayments made monthly. This is much smaller than the average mortgage size in Australia.

Car loans are usually based on a $30,000 loan over a 5 year term, while personal loans are generally based on a $10,000 loan over a period of 3 years, unless stated otherwise.

So while the comparison rate is useful for working out which loans are more competitive and making sure you’re comparing apples with apples, make sure to chat with your lender or use a financial calculator to find the dollar amount you’ll pay.

Why is the comparison rate important?

The idea behind the comparison rate is to give you a more accurate idea of how much a home loan will cost. Without it, lenders could hide any fees and extra charges behind a seemingly inexpensive rate.

By standardising the cost of a loan, the comparison rate makes it much easier to compare different offers from a range of lenders.

For example, Lender A might offer a loan with a 6.40% p.a. interest rate and a 6.50% p.a. comparison rate, meaning the fees and extra charges add an extra 0.10% p.a. to the loan.

Meanwhile, Lender B advertises a loan with a 6.30% p.a. interest rate but with fees equating to 0.40% p.a. of the loan, giving us a comparison rate of 6.70% p.a.

If we only took the interest rate into consideration, we’d be left thinking that Lender B had the more competitive offer. But the comparison rate shows us we’d be better off opting for Lender A, at least in terms of cost.

Even a slight difference in interest rates can mean thousands of dollars saved, not to mention being debt-free sooner than you would if you were paying a higher rate.

Comparison rate FAQs

What should you consider when comparing home loans?

The comparison rate is one of the first things you should look for when shopping for a loan, but there are several other factors that will affect the cost of the loan in both the long and short term, such as:

What does p.a. mean?

P.a. stands for ‘per annum’ (meaning ‘a year’). When preceded by an interest rate it indicates the total amount of interest that a bank or lender will charge you over a year.

Can the comparison rate be lower than the interest rate?

There are a few scenarios where a comparison rate will actually be lower than the advertised interest rate. For example, on loans that come with an introductory discount rate or those that offer a discount of 0.01% p.a. every year.

The comparison rate will also be lower on fixed rate loans that revert to a cheaper variable rate. For example, if a loan has a 5-year fixed rate of 5.99% p.a. but the current variable revert rate is 4.00% p.a., the comparison rate would be lower as 20 years of the calculation would use the much cheaper variable rate.

How can I compare loans?

A good place to start is Mozo’s range of comparison pages, whether you’re looking for home loan, personal loan or car loan.

Head over to our interest rates comparison page to see the latest rates for home loans, savings accounts, term deposits and more.

Evlin DuBose
Evlin DuBose
Senior Money Writer

Evlin, RG146 Generic Knowledge certified and a UTS Communications graduate, is a leading voice in finance news. As Mozo's go-to writer for RBA and interest rates, her work regularly features in Google's Top Stories and major publications like

Niko Iliakis
Niko Iliakis
Money writer

Niko has three years experience as a finance journalist. He specialises in home loans, business loans and interest rate movements at Mozo.