When you’re shopping for a home loan, you’ll see two interest rates advertised: the headline rate and the comparison rate. Many borrowers focus solely on the headline rate — which can be a costly mistake. Here’s why the comparison rate matters, and how to use it correctly when evaluating home loan offers.
What Is the Headline (Advertised) Rate?
The headline rate is the base interest rate charged on your loan — the rate used to calculate your repayments. Lenders use this number prominently in advertising because it’s the most favourable-looking figure. But it tells only part of the story.
What Is the Comparison Rate?
The comparison rate is designed to give you a more realistic picture of the true cost of a loan. It incorporates the headline rate plus most fees and charges — including application fees, annual fees, monthly account-keeping fees, and other standard charges — expressed as a single annual percentage rate.
Under the National Consumer Credit Protection Act, lenders are required to display a comparison rate alongside their advertised interest rate for personal credit products, calculated on a standard loan amount ($150,000 over 25 years for most home loans).
Why the Gap Between Rates Matters
The bigger the difference between the headline rate and the comparison rate, the higher the fees attached to that loan. A loan advertising 5.90% with a comparison rate of 6.40% has $50 worth of difference per year on every $10,000 borrowed — which adds up quickly on a large loan.
Conversely, a loan with a 6.10% headline rate but a comparison rate of 6.12% has almost no additional fees — making it potentially a better deal than the lower-headline-rate loan with heavy fees.
The Limitations of Comparison Rates
While useful, comparison rates have significant limitations you should be aware of:
Standardised loan amount: Calculated on $150,000 over 25 years — which is much smaller than most real loans today. The fee impact on a $700,000 loan over 30 years will be proportionally different.
Excludes some costs: Comparison rates don’t include government charges (like stamp duty), LMI, redraw fees, or offset account fees — which can be significant.
Can’t factor in features: An offset account or redraw facility can save you far more in interest than any fee difference — but this benefit doesn’t show up in the comparison rate.
Variable rates change: If the headline rate is variable and can change, the comparison rate becomes less predictive over time.
How to Properly Compare Home Loans
A good home loan comparison takes into account: the interest rate (both headline and comparison), all fees over the life of the loan based on your actual loan amount and term, the features available (offset, redraw, extra repayments), lender flexibility (hardship policies, rate review options), and the lender’s reliability and customer service track record.
This is exactly the analysis a mortgage broker performs for you — and why using a broker who compares across many lenders is so valuable.
Assembly Finance Does the Hard Work for You
We compare home loans from a wide panel of lenders — taking into account rates, fees, features, and your individual needs — to find the loan that’s genuinely the best fit for you. Not just the lowest headline rate. Get in touch with James for a free loan comparison.
