What Is a Comparison Rate on a Home Loan and Why It Matters 2026

When you browse home loan advertisements in Australia, you will see two rates displayed side by side: the headline interest rate and the comparison rate. The headline rate might be 5.89%, while the comparison rate is shown as 6.12%. The comparison rate is meant to help you cut through the marketing and see the true cost of a loan — but its usefulness is limited by the assumptions built into its calculation.

If you are looking for “comparison rate home loan explained Australia,” this guide unpacks what the comparison rate includes, what it does not include, why it assumes a $150,000 loan (which is increasingly irrelevant), and how to use it alongside other tools to make a genuinely informed home loan decision in 2026.

What the Comparison Rate Is and How It Is Calculated

The comparison rate was introduced in 2003 under the National Credit Code as a consumer protection measure. Its purpose is to combine the headline interest rate with most known fees and charges into a single percentage figure, so borrowers can compare the true annualised cost of different loans at a glance.

The standardised calculation assumes a $150,000 loan over a 25-year term with principal-and-interest monthly repayments. The comparison rate includes:

• The headline interest rate
• Upfront establishment or application fees
• Ongoing monthly or annual account-keeping fees
• Valuation fees (if charged)
• Settlement fees (if charged)

The comparison rate does not include:

• Government charges (stamp duty, mortgage registration fees, discharge of mortgage fees)
• Break costs on fixed rate loans (these are contingent and vary with market rates)
• Redraw fees or early repayment fees (these are contingent on your behaviour)
• Lenders Mortgage Insurance (LMI) premiums
• Fees for optional services (e.g., switching between fixed and variable)
• The value of offset accounts (which reduce your effective interest cost)
• Introductory or honeymoon rate periods (the comparison rate assumes the rate stays the same for the full 25 years, which makes it inaccurate for loans with low introductory offers that revert to a higher standard variable rate)

The $150,000 Problem: Why Your Loan Size Matters

The most significant limitation of the comparison rate is that it is calculated on a $150,000 loan. In 2026, the average new home loan in Australia is above $600,000, making the $150,000 assumption four times smaller than the typical borrower’s reality. This distorts the comparison rate’s usefulness in two important ways.

First, fixed-dollar fees are amplified. An establishment fee of $600 represents 0.40% of a $150,000 loan but only 0.10% of a $600,000 loan. The comparison rate therefore overstates the annualised cost of fixed fees for borrowers with larger loans. A loan with a high upfront fee but a low interest rate might look worse on the comparison rate than it actually is for someone borrowing $800,000, because the fee is amortised over a much larger principal.

Second, ongoing fees are similarly distorted. A $395 annual package fee on a $150,000 loan adds approximately 0.26% to the effective rate. On a $600,000 loan, the same fee adds approximately 0.07%. The comparison rate treats both borrowers as if they are paying the same proportional cost.

The practical consequence: when comparing loans, the comparison rate is most useful for ruling out loans with obviously high total costs. But it cannot tell you which loan is cheaper for your specific loan amount if the loans have different fee structures. A loan with a 6.20% headline rate, no fees, and a 6.20% comparison rate might be cheaper than a loan with a 5.99% headline rate, a $395 annual fee, and a 6.29% comparison rate — but only if your loan is large enough for the 0.21% interest rate saving (which grows with the loan size) to outweigh the $395 annual fee (which is fixed). On a $150,000 loan, the all-in cost of the first loan is lower because the fee on the second loan is proportionally large. On a $600,000 loan, the 0.21% rate saving on the second loan is worth $1,260 per year, far exceeding the $395 fee, making the second loan cheaper despite the higher comparison rate.

The Comparison Rate Cannot Capture Offset or Redraw Value

A loan with a 100% offset account provides a real financial benefit — it reduces the effective interest you pay — but this benefit is invisible to the comparison rate. Consider two loans in mid-2026:

• Loan A: 6.20% headline rate, $395 annual package fee, 100% offset account. Comparison rate: 6.53%.
• Loan B: 6.00% headline rate, no annual fee, no offset account. Comparison rate: 6.00%.

On comparison rate alone, Loan B looks far cheaper. But if you maintain an average balance of $50,000 in your offset account against a $500,000 loan on Loan A, the effective interest rate — the rate at which you actually pay interest, accounting for the offset balance — drops significantly. You are paying 6.20% on $450,000 (the loan minus offset) but the rate is expressed against the full $500,000. The effective pre-fee rate is approximately 5.58%. After adding the $395 fee (approximately 0.08% of $500,000), the effective all-in cost is roughly 5.66% — below Loan B’s 6.00%.

The comparison rate says Loan B is cheaper. In reality, for a borrower with meaningful savings, Loan A is cheaper — by a margin of 0.34%, which on a $500,000 loan is $1,700 per year. This is the comparison rate’s most important blind spot, and it is one that almost every borrower with an offset account will encounter.

For a detailed comparison of offset accounts versus redraw facilities and which saves more, read our offset vs redraw guide.

Introductory Rates: Another Trap That the Comparison Rate Obscures

Some lenders offer a low introductory or honeymoon rate for the first 12–24 months, after which the loan reverts to a higher standard variable rate. The comparison rate assumes the interest rate stays the same for the full 25 years — which means it treats the introductory rate as if it is the permanent rate. For example, a loan with a 4.99% introductory rate for 12 months, reverting to 6.79% for the remaining 24 years, might show a comparison rate of 6.39%. But the calculation assumes a 4.99% rate for 25 years, which understates the true cost. The actual cost of this loan over 25 years, accounting for the revert, is higher than 6.39% — but the comparison rate will not tell you that because the revert rate is not included in the calculation.

How to spot this trap: if the headline rate is dramatically lower than the comparison rate, there is usually a reason — high fees, an introductory period, or both. Read the terms carefully and model the actual repayments using our mortgage repayment calculator rather than relying on the comparison rate alone.

How to Use the Comparison Rate as a Filter

Despite its limitations, the comparison rate remains a useful quick filter — provided you understand what it can and cannot tell you. Here is a practical approach to using it in 2026:

Step 1: Filter by comparison rate. If one loan has a comparison rate 0.50% or more above another, it is likely genuinely more expensive, even accounting for the $150,000 model loan’s distortions. Eliminate loans with outlier-high comparison rates from your shortlist. This is the comparison rate’s best use: ruling out the worst options, not picking the best one.

Step 2: Model the actual cost for your loan amount. Once you have a shortlist of 2–4 loans, calculate the actual total cost over 3–5 years using your real loan amount and considering all fees. This is where our mortgage repayment calculator becomes essential: it lets you compare two loans side by side with your actual numbers, not a $150,000 proxy.

Step 3: Factor in offset account value if you carry a savings balance. If you typically hold $20,000, $50,000, or more in savings, a loan with an offset account may be cheaper on an effective basis than a no-fee loan with a lower headline rate — even though the comparison rate looks worse. Calculate the effective rate on the offset loan (interest paid on the net balance, divided by the full loan amount, plus fees as a percentage) and compare it to the no-offset alternative.

Step 4: Do not ignore features. A loan with a slightly higher comparison rate might offer meaningful features — a 100% offset account, free extra repayments, a redraw facility, the ability to split fixed and variable — that are worth paying a small premium for. The comparison rate treats all loans as identical except for rate and fees, but loans are not identical products.

Real Example: Comparing Two 2026 Loan Offers

Emily is borrowing $550,000 to buy an apartment in Melbourne. She holds approximately $40,000 in savings and wants a loan with an offset account. She has two offers:

• Offer 1: Major bank package loan. 6.15% headline rate, $395 annual package fee, 100% offset account, free redraw, credit card included. Comparison rate: 6.47%.
• Offer 2: Online lender basic loan. 5.89% headline rate, no annual fee, no offset account, redraw available. Comparison rate: 5.89%.

Comparison rate says Offer 2 is 0.58% cheaper. But Emily plans to keep $40,000 in her offset account. With Offer 1, her effective interest cost is 6.15% on $510,000 (loan minus offset), for an effective pre-fee rate of approximately 5.70% on the full $550,000. Add the $395 fee (0.07% of the loan), and the effective all-in rate is approximately 5.77%. With Offer 2, she pays 5.89% on the full $550,000 with no offset benefit. Offer 1 is actually cheaper by 0.12% — approximately $660 per year — despite having a comparison rate 0.58% higher.

For more on how even a small rate difference affects your total costs, see our mortgage repayment guide and our refinance guide for the savings math.

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Use the Mortgage Repayment calculator to compare two loan scenarios with your actual loan amount and see the real cost difference, including fees and offset account benefits. Visit /calculators/mortgage-repayment/ to run your comparison.

Disclaimer

Disclaimer: This article provides general estimates only and does not constitute financial, tax, or legal advice. Rates, thresholds, and rules change. Always refer to the ATO, your state revenue office, or a licensed professional for your specific circumstances. Last updated: July 2026.