7 min read | 9 Aug 2022
Every time you see home loan interest rates advertised, there’s something called a comparison rate next to it. Generally, it’s higher, and sometimes much higher, than the initial interest rate. Rarely is it lower.
It can be confusing to understand what rate a lender will charge you. The interest rate, or the comparison rate? What is a comparison rate, and why is it usually higher than the actual interest rate?
A comparison rate is a percentage rate that can help you work out the true, all-inclusive cost of a loan. It combines not just the loan interest rate but the main fees and charges too, to give you a total percentage that's a much closer estimate of what you'll be charged for a particular loan.
In addition to helping you understand what you’re paying for, it’s there to make lenders more accountable and transparent when communicating the loan’s costs. Lenders are required by law to let you know what the comparison rate is, which as the name suggests, makes it easier for borrowers to make comparison between them.
A home loan interest rate (shown as a percentage) tells you the price a lender will charge you per year to borrow their money to buy a home. To work out what the rate translates into as loan repayments, multiply the rate by the outstanding loan amount (ie. the Principal) for an annual figure, then divide that answer by 12 (for monthly repayments) or 26 (for fortnightly repayments).
For example: $600,000 principal x 2.1% annual interest rate = $12,600 per year $12,600 / 12 months = $1,050 in interest each month or $484.62 each fortnight.
Even though it’s worked out as an annual percentage, that rate can go up and down in line with what’s happening in financial markets generally (unless it’s a fixed-rate loan, where it stays the same for the entire period it’s fixed).
Earning interest on loans is the reason most lenders even exist, but too many of them also add extra fees on top to make even more from you, and that’s what makes the comparison rate so handy (Athena charges zero fees!).
Put simply, the interest rate is what you’re charged each year on your borrowed amount but it doesn’t consider the costs, whereas the comparison rate is an overall rate that provides a more accurate representation of the true cost of the loan – it includes the interest rate and those costs, fees and other factors we’ve mentioned above.
Comparison rates are a great reality check because they show a more complete picture of a lender’s offer. But because some loan costs either aren’t charged via a lender or are only charged in exceptional circumstances, they're not included in the comparison rate.
We’re talking stamp duty (charged by the government), conveyancing fees (charged by a solicitor), late payment fees, break costs and early termination fees, deferred establishment fees and redraw fees (which lenders could charge if they became necessary but are impossible to anticipate for an individual borrower).
Ok so on those costs, fees and other factors, lenders are required by law to use exactly the same variables when calculating their comparison rates. You’ll see it summarised in the fine print as – “Comparison rate based on a loan amount of $150,000 over 25 years”.
The following variables are used when calculating comparison rates:
Loan amount of $150,000
25-year loan term
Interest rate, including known changes to the interest rate such as introductory, interest only or fixed rate periods
Annual Fees (if any)
Monthly fees (if any)
Valuation fee (if any)
Establishment fee (if any)
Mortgage documentation fee (if any)
Settlement fee (if any)
The only problem these days is that very few loans are for $150,000 and lots of loans are for 30 years, and those small differences can add up to big differences.
So even though comparison rates are pretty good at comparing what different lenders are offering, if it’s possible for you to do more in-depth number crunching based on the specifics of your loan amount and term, it can only be a good thing.
Because the comparison rate is a figure that includes the interest rate and other charges, it’s usually higher. Some lenders charge more for their extras than others, so there can be a big difference between the interest rates they crow about and the comparison rates that borrowers have to fork out. At Athena, we have zero fees, which keeps our comparison rates nice and low.
All the fees we don't charge: ✓ $0 Athena application fee ✓ $0 Athena monthly fee ✓ $0 Athena annual fee ✓ $0 Athena redraw fee ✓ $0 Athena offset fee ✓ $0 Athena discharge fee ✓ $0 Application valuation costs ✓ $0 Solicitor settlement costs
The loan with the lowest interest rate isn’t necessarily the cheapest home loan. Comparison rates were made mandatory to stop lenders advertising appealing low interest rates that actually cost far more than what borrowers expected.
The variables used to calculate a comparison rate could change an appealing advertised annual interest rate to something much less competitive and attractive. It can be a really useful tool when comparing apples with apples.
Aussies borrow a lot more than $150,000 on average, and not everyone’s loan term is 25 years. Some of us pay it off fortnightly rather than monthly, too. So when you consider all these factors, the advertised comparison rate most likely won’t reflect your situation.
That’s why you’ll see this friendly caveat with comparison rates –
“WARNING: 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. Comparison rates for variable interest-only loans are based on an initial 5 year interest only period. During an interest-only period, your interest only payments will not reduce your loan balance. This may mean you pay more interest over the life of the loan.”
This means that you should use the comparison rate as a ‘like for like’ guide rather than the definitive guide for your circumstances. It may be useful to work out your personalised comparison rate too.
Using your own numbers and situation, take our calculator for a spin to see what you’d pay for an Athena home loan and what you could save compared to other loans. Do the same with other lenders, so you can see what repayments look like if you’re stuck with a heftier comparison rate.
At Athena we want you to love us and leave us. We offer super low interest rates and yes, some of our comparison rates are lower than our advertised interest rate!
Why? Because we don’t charge fees and we add discounts to your rate over the life of your loan like with our new AcceleRATES! (We also encourage you to hack your home loan. Every sneaky bit counts.)