What Is a Comparison Rate? Australian Finance Explained
If you have ever looked at a loan advertisement in Australia, you will have noticed two interest rates displayed side by side: the headline rate and the comparison rate. The comparison rate is designed to help you understand the true cost of a loan by bundling in most fees and charges. But is it always reliable? This guide explains how comparison rates work, when they are genuinely useful and when they can lead you astray.
- A comparison rate includes the interest rate plus most fees, expressed as a single percentage
- It is a legal requirement to display comparison rates in Australian credit advertising
- Comparison rates are calculated on a standardised $150,000 loan over 25 years
- They do not capture features like offset accounts, redraw or introductory rate expiry
- Always request a personalised cost breakdown for your actual loan amount and term
The Legal Requirement
In Australia, the comparison rate regime is governed by the National Consumer Credit Protection Act 2009 (NCCP Act) and Schedule 1 of the National Consumer Credit Code (NCC). ASIC (the Australian Securities and Investments Commission) provides guidance through Regulatory Guide 137 (RG 137).
The law requires that whenever a credit provider or broker advertises an interest rate for a regulated consumer credit contract, a comparison rate must also be shown. This applies to home loans, personal loans, car loans and any other regulated credit product. The comparison rate must be displayed with equal prominence to the headline rate.
How the Comparison Rate Is Calculated
The comparison rate is calculated using a standardised formula prescribed by Schedule 6 of the NCC. It takes into account:
- The nominal interest rate (the headline or advertised rate)
- Upfront establishment or application fees
- Ongoing monthly or annual account-keeping fees
- Discharge or termination fees
- Any other fees that are certain to be charged during the life of the loan
All these costs are combined and expressed as a single annual percentage rate, based on a reference loan of $150,000 over 25 years for secured loans. This standardisation allows you to compare apples with apples across different lenders.
A Practical Example
| Loan Product | Headline Rate | Annual Fee | Comparison Rate |
|---|---|---|---|
| Lender A – Basic Variable | 5.99% p.a. | $0 | 6.01% p.a. |
| Lender B – Feature Variable | 5.89% p.a. | $395 | 6.15% p.a. |
| Lender C – Honeymoon Variable | 5.49% p.a. (yr 1) | $10/month | 6.38% p.a. |
In this example, Lender A has the highest headline rate but the lowest comparison rate because it charges no ongoing fees. Lender C's attractive 5.49% honeymoon rate is the most expensive overall once fees and the revert rate are factored in.
When Comparison Rates Are Useful
Comparison rates work best when you are comparing similar products of a similar size and term. They are particularly valuable for:
- Quickly shortlisting home loans in the early research phase
- Identifying products where high fees inflate the true cost above the headline rate
- Spotting honeymoon or introductory rates that revert to a much higher rate
- Comparing no-frills basic loans against feature-rich products
When Comparison Rates Can Be Misleading
Despite their usefulness, comparison rates have significant limitations:
- Loan amount matters: Because the comparison rate is based on $150,000, a $600 annual fee has a proportionally smaller impact on a $600,000 loan. Conversely, the same fee has a larger impact on a $20,000 car loan. The comparison rate overstates the fee impact for large loans and understates it for small ones.
- Offset accounts are ignored: A loan with a 100% offset account can save you thousands in interest if you keep significant funds in the offset. This benefit is not reflected in the comparison rate.
- Redraw and flexibility are invisible: Products with free extra repayments, redraw facilities and portability features may justify a slightly higher cost that the comparison rate does not communicate.
- Fixed rates and break costs: Comparison rates for fixed-rate loans do not include potential break costs, which can run into thousands of dollars if you exit the loan early.
How to Compare Loans Properly
Rather than relying solely on the comparison rate, take a more comprehensive approach:
- Use the comparison rate as a filter: Shortlist products with competitive comparison rates, then dig deeper into the features and fees.
- Request a full cost schedule: Ask each lender for a breakdown of all fees and charges specific to your loan amount and term.
- Calculate total cost of the loan: Multiply your monthly repayment by the number of months, then add all fees. This gives you the true dollar cost for comparison.
- Consider features you will actually use: An offset account is only valuable if you will maintain a meaningful balance in it. A redraw facility only helps if you plan to make extra repayments.
- Talk to a broker: A broker can run personalised comparisons across dozens of lenders, factoring in your specific loan amount, term and the features that matter to you.
- Never choose a loan based solely on headline rate or comparison rate.
- The comparison rate warning that appears on all ads is not just legal boilerplate — it is genuinely important advice.
- Comparison rates for fixed loans do not account for break costs if you exit early.
WARNING: This comparison rate is true only for the example 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 are based on a secured loan of $30,000 over 5 years for vehicle finance and $50,000 over 5 years for equipment finance, as required under the National Credit Code.