Comparison rate explained: why the advertised rate isn't the full cost

You see an advertised home loan rate of 5.69% and think that’s the cost you’ll pay. In reality, that number tells only part of the story. Fees, charges and structural assumptions can push your true cost higher — sometimes by more than half a percentage point. That’s where the comparison rate comes in.

Every Australian lender is legally required to display a comparison rate alongside their advertised rate. But many borrowers still don’t know how it works, what it includes, and — just as important — what it leaves out. This article explains the comparison rate in 2026, with real‑world numbers from today’s market, so you can compare loans with clarity.

What is a comparison rate?

A comparison rate is a single percentage figure that combines the loan’s interest rate with most of the fees and charges that apply over the loan’s life. It’s designed to give you an “apples with apples” view of two different loans, even when their fee structures differ.

The National Consumer Credit Protection Act requires lenders to show the comparison rate whenever they advertise an interest rate for a residential loan. The rate is calculated using a standard set of assumptions:

· A loan amount of $150,000
· A loan term of 25 years
· All interest rates remain unchanged for that period
· Fees such as application fees, ongoing monthly or annual fees, valuation fees and settlement fees are included

Because the calculation uses the same dollar amount and term for every loan, you can compare the rates directly — in theory. In practice, the $150,000 assumption means the comparison rate is most accurate for loans around that size. For larger loans, the impact of fixed fees shrinks, so the comparison rate may appear worse than your actual cost.

How the comparison rate is calculated

The comparison rate is essentially a modified internal rate of return on the loan. It takes the advertised interest rate and adds the effect of all upfront and ongoing fees, then expresses that total as a single annualised percentage.

For example, consider a variable loan with a headline rate of 5.69% and no upfront or ongoing fees. Its comparison rate will be exactly 5.69%. Now take a competing loan with a lower headline of 5.49% but an annual fee of $395. The comparison rate for that second loan will be higher — around 5.75% — because the annual fee is spread across a $150,000 balance over 25 years.

The formula is set by the National Credit Code and is the same for all lenders. That consistency is what makes the comparison rate a useful starting point. But as we’ll see, it’s not the finish line.

Why the comparison rate isn’t the full story

The comparison rate is a valuable tool, but it has important blind spots. Here’s what it does not include:

· Lenders mortgage insurance (LMI) – Even though LMI is a significant cost for borrowers with less than a 20% deposit, it’s not baked into the comparison rate.
· Redraw fees – If you want to access extra repayments, some lenders charge a fee. The comparison rate ignores this.
· Early repayment or break costs – Fixed‑rate loans often have break costs that can run into thousands of dollars. Not included.
· Offset account fees – Some offset accounts have monthly charges, but the comparison rate only includes standard package fees.
· APRA serviceability buffer – The Australian Prudential Regulation Authority requires lenders to assess your ability to repay at an interest rate 3% above the loan’s actual rate. This buffer is a regulatory requirement, not a fee, but it affects your borrowing power — and it’s invisible in the comparison rate.
· Debt‑to‑income (DTI) limits – Since February 2026, APRA has capped new lending at a maximum DTI of 6 times gross income for most borrowers. The comparison rate says nothing about whether you’ll actually qualify.

Additionally, the comparison rate assumes you keep the loan for the full 25 years. If you refinance or sell after five years, the impact of upfront fees is magnified — and the comparison rate will understate the true cost of a loan with high establishment charges.

Real‑world example: comparing two loans in 2026

Let’s put the comparison rate to work using today’s numbers. The RBA cash rate stands at 4.35% , and the lowest advertised variable rates are around 5.69%. But not all 5.69% loans are equal.

· Loan A – Low‑cost variable
– Advertised rate: 5.69%
– Upfront fee: $0
– Annual fee: $0
– Comparison rate: 5.69%
– Features: basic online loan, no offset, no redraw

· Loan B – Low‑rate variable with fees
– Advertised rate: 5.49%
– Upfront fee: $600
– Annual fee: $395
– Comparison rate: 5.75% (based on $150k/25‑year formula)

At first glance Loan B looks cheaper by 0.20%. But once fees are factored in, Loan A is actually cheaper — by about 0.06% on the comparison rate. For a $150,000 loan, that difference works out to roughly $90 per year.

Now imagine you’re borrowing $750,000 to buy a home in Sydney (within the First Home Buyer Guarantee cap of $1.5 million from July 2026). The annual fee of $395 is a smaller fraction of the loan balance. Loan B’s actual cost relative to Loan A narrows. In many cases, the loan with the lower headline rate and modest fees becomes the better deal for larger loan amounts — even though its comparison rate is higher.

That’s why the comparison rate is a guide, not a gospel. Always check the fee structure and run the numbers for your specific loan size.

How to use the comparison rate effectively

To get the most out of the comparison rate when shopping for a home loan in 2026, follow these principles:

· Use it for side‑by‑side screening – When you first shortlist loans, the comparison rate helps you rule out loans that are clearly expensive. But don’t stop there.
· Adjust for your loan amount – If you’re borrowing $150,000 or less, the comparison rate is fairly accurate. For larger amounts, calculate the dollar cost of fees yourself. A $395 annual fee on a $500,000 loan adds only 0.08% to the effective rate.
· Consider features you’ll actually use – An offset account that costs $10 per month and reduces your interest might be worth more than the fee. The comparison rate ignores that benefit.
· Account for the APRA buffer – Whether a loan is affordable depends partly on its buffer test. A variable rate of 5.69% means you must be assessed at 8.69% . That test is unrelated to the comparison rate.
· Factor in the DTI cap – With the 6x income limit, your borrowing capacity is capped regardless of how low the comparison rate is.
· Look at the loan’s flexibility – Redraw availability, portability and the ability to split between fixed and variable all affect long‑term value. The comparison rate captures none of them.

Comparison rate and refinancing in 2026

If you’re refinancing, the comparison rate can help but needs careful interpretation. Your existing loan likely has different features and a different term remaining. The comparison rate assumes a brand‑new 25‑year loan of $150,000 — almost certainly not your situation.

A more useful metric for refinancing is the break‑even point: how long it takes for the savings from a lower rate to offset the upfront fees of a new loan. With the RBA holding at 4.35% and rates expected to remain elevated through 2026, many borrowers are locking in fixed rates for 3‑5 years. The comparison rate on a fixed loan is calculated using the same 25‑year assumption, but if you break the fixed term early, you could face substantial break costs — often thousands of dollars. Those costs are not reflected in the comparison rate either.

Before you refinance, use our refinancing break‑even calculator to see whether switching makes sense for your loan balance and current rate.

Frequently asked questions

1. Does the comparison rate include lenders mortgage insurance (LMI)?
No. LMI is not included in the comparison rate. That’s a significant omission for borrowers with less than a 20% deposit. Even though LMI is a one‑off premium or capitalised cost, it can add thousands of dollars to your loan — yet it doesn’t appear in the comparison rate. Always ask for a full cost breakdown including LMI.

2. Is the comparison rate accurate for a loan of $1 million?
Not really. The standard calculation uses a $150,000 loan over 25 years. On a $1 million loan, fixed annual fees become much less significant, so the comparison rate will overstate the cost of high‑fee loans and understate the benefit of low‑rate, high‑fee options. A better approach is to calculate the effective interest rate based on your actual loan amount.

3. Does the comparison rate account for package discounts or loyalty rates?
No. The comparison rate is calculated using the standard variable or fixed rate advertised, not any special discounts you might negotiate. If you receive a professional package discount or a loyalty reduction, your actual rate will be lower than the displayed comparison rate. Always ask the lender what rate you qualify for.

4. Is the comparison rate useful for fixed‑rate loans?
Yes, with caution. Fixed‑rate loans have a comparison rate calculated the same way as variable loans. However, break costs are not included. If you fix for 3 years and need to exit early, the penalty could be much larger than the rate difference suggests. Use the comparison rate to compare the ongoing costs of fixed loans, but factor in potential break expenses separately.

5. How often should I check the comparison rate on my existing loan?
It’s worth reviewing your loan’s comparison rate whenever you receive a rate change notification. Lenders often update variable rates but also adjust fees. A loan that was competitive when you took it out may have a higher comparison rate after a series of fee increases. If the gap between your loan and the best available rates widens, consider refinancing.

Sources

· Australian Prudential Regulation Authority (APRA) – Serviceability buffer and DTI limits (letter to ADIs, February 2026)
· Reserve Bank of Australia – Cash rate target (4.35%, as at July 2026)
· Housing Australia – First Home Buyer Guarantee: price caps and eligibility (effective 1 July 2026)
· Australian Securities and Investments Commission (ASIC) – Comparison rate requirements under the National Consumer Credit Protection Act
· State Revenue Offices (NSW, Qld, Vic, WA) – Updated FHBG purchase caps

Use our loan comparison calculator

The comparison rate is a powerful starting point, but your personal situation — loan size, features, repayment style and future plans — determines the real cost. Try our loan comparison calculator to model two loans side by side using your exact numbers. It accounts for fees, offset savings and loan term variations that the standard comparison rate ignores.

Ready to compare loans with the full picture? Click the button below to open an interactive widget that lets you adjust assumptions and see the true cost.

Open Loan Comparison Widget

For more guidance, read our detailed comparison of loan features in 2026 and the fixed vs variable rate decision . If you’re thinking about switching, the refinancing break‑even guide will help you decide.