Comparison rate calculator

What is a comparison rate?

A comparison rate is the interest rate a loan would carry if all of its fees were charged as interest instead. It exists because a low advertised rate with heavy fees attached can cost more than a higher rate with none, and the headline rate alone will never tell you which is which.

Every Australian credit provider has to publish one alongside any advertised rate. That obligation is the useful part. The number itself is only as relevant as the example loan it was calculated on.

On the example loan in the intro the answer is 6.10%, against a 6% rate. Just under a tenth of a percentage point is what $12,800 of fees is worth, spread across thirty years of a large balance.

Why the advertised comparison rate is not your comparison rate

The comparison rate in an advertisement is calculated on a standard example loan set by the credit regulations, not on the loan you are applying for. That standardisation is what makes two advertisements comparable with each other. It is also what makes both of them a poor guide to your own loan.

Flat fees are the reason. A $395 annual fee is the same $395 whether the balance is $150,000 or $900,000, so as a proportion of the loan it shrinks as the loan grows. Here is the same rate and the same fees across four example loan sizes, all over 30 years.

Same rate, same fees, four different answers. In rate terms the fee load costs the small borrower six times what it costs the large one. Nothing about the loan changed except its size.

So the direction of the error depends on you. If your loan is larger than the prescribed example, the advertised comparison rate overstates what the fees will cost you. If it is smaller, the advertised figure is flattering the loan and you will pay more than it suggests.

What a comparison rate deliberately leaves out

Only fees that can be worked out at the start go into the calculation. Anything that depends on what you do later is excluded by design, because a rate cannot price a decision you have not made yet.

• Redraw fees, which depend on how often you pull money back out
• Break costs on a fixed loan, which depend on wholesale rates at the moment you break
• Late payment and dishonour fees
• Valuation fees, where they are charged only in some cases
• Lenders mortgage insurance, which depends on your deposit rather than on the loan product
• Anything the lender can vary during the term, including the rate itself

That is a reasonable exclusion list and a genuine limitation at the same time. A loan can be cheap on the comparison rate and expensive to live in, and the two exclusions that catch people most often are break costs and lenders mortgage insurance.

The calculator above follows the same convention, because the fields it gives you are the fees you can know on day one. Fees you cannot put a figure to are not fees you can fold into a rate.

Two loans, the same comparison rate, different money

A comparison rate weights money by when it moves. A dollar of fee paid at settlement counts for more than a dollar paid in year twenty-nine, which is correct arithmetic and a very poor guide to your bank statement.

The two loans are identical on the comparison rate and they are not identical on cost. Held to term, Loan A is $2,823 cheaper. Refinanced after five years, Loan A is $1,420 dearer, because its $3,000 upfront fee never got the thirty years it needed to earn its keep.

Most borrowers do not keep a loan for thirty years. If you expect to move, sell or refinance well inside the term, weight the upfront fees harder than the comparison rate does.

Using the comparison rate calculator on a real quote

The tool is only worth running on real numbers. Get them off the quote or the key facts sheet rather than the advertisement, then work through in this order.

1. 1

   Put in your loan, not the example

   The amount you are actually borrowing and the term you are actually taking. This is the whole point of running it yourself, and it is the input the advertised figure could never have.

2. 2

   Enter the rate you were quoted

   The rate on the offer in front of you, including any discount that has been agreed. Not the advertised rate, which almost nobody pays.

3. 3

   Add every upfront fee together

   Application, establishment, settlement and legal fees charged by the lender all go in the one field. They are all money advanced against, so they all shift the rate.

4. 4

   Add the ongoing fees for a full year

   An annual package fee, or twelve times a monthly account fee. If a package fee covers a card or an offset you would have paid for anyway, that is worth remembering when you read the result.

5. 5

   Add the discharge fee

   Charged once at the end, when the mortgage comes off the title. It moves the number least of any fee on the page, which is itself worth seeing.

Then run the same exercise on the second quote and compare the two results, not the two headline rates. The gap row on the panel tells you how much of each loan's cost is hiding in its fees.

The one thing a comparison rate cannot price

Every rate on this page assumes you have been offered it. That assumption does more to decide the cost of your loan than any fee in the calculator.

• Lenders price in loan-to-value ratio bands, so a slightly larger deposit can move you to a cheaper tier
• Some price by loan size, with sharper pricing above a threshold
• Some hold their best pricing for refinances and never advertise it
• Some will not lend at their best rate on certain property types or postcodes
• Whether your income shape fits a lender's policy decides whether you see their sharp tier at all

None of that shows up in a comparison rate, and none of it is published in a form you can compare from the outside. It is why we compare a panel of more than 40 lenders on your file rather than reading rate tables at you.

What the calculator gives you is an estimate from the figures you entered. It is not a quote and not an approval, and no lender is bound by it. Send us the two quotes and we will tell you which one is genuinely cheaper for your loan.