Interest Rate vs Comparison Rate: What you need to know

What’s the difference between an interest rate and comparison rate in a nutshell?

An interest rate is charged by a bank and is the cost to borrow money. A comparison rate includes the interest rate plus certain fees specific to the actual loan product.

What is an interest rate?

The interest rate is important when it comes to borrowing or saving money. It’s the cost of borrowing money, for example in a home, car or personal loan; or if you’ve got your money deposited in a savings account or term deposit, it’s the amount a bank pays you to ‘hold’ your money. 

What is a comparison rate?

In addition to the interest rate, a comparison rate takes into account the certain fees associated with the home loan over its lifetime: some of the fees can include the application/loan processing fee, legal fees, on-going fees and loan discharge fee. That is why a comparison rate is commonly higher than its interest rate. Because comparison rates include certain fees and the interest rate, they provide a way of comparing loans on an even playing field.

Why are both these rates important?

Both rates are important depending on what information you are looking for. The interest rate of a loan can be used to calculate how much your repayments will be. A comparison rate is useful when comparing multiple loans because it’s an easier way to see a true cost comparison.

It’s important to remember…

Comparison rates don’t cover everything. Home loan comparison rates are based on a $150,000 loan over 25 years (which is defined by legislation). So for example, if you’re borrowing more than $150,000, the actual comparison rate in your circumstances would be lower than the one advertised, while if you’re repaying over a shorter period (ie less than 25 years), it could be higher. Comparison rates also don't cover every single cost associated with a loan (see inclusions and exclusions below). This means the comparison rate may not be 100% accurate for your exact situation. 

A key facts sheet (KFS) is designed to help you choose the right home loan. It is a summary of the loan you are looking at, including a personalised comparison rate and an estimation of the costs of your home loan. It also explains what will happen if interest rates rise or if you roll from a fixed rate.

Things which can be included, but not limited to:

• The interest rate of the loan

• Any application or package fees associated with the loan

• Any settlement fees

• Any ongoing fees associated with the loan

• Any discharge or exits fees associated with the loan

Things which aren’t included:

• Any fees that are associated with optional features

• Government fees and charges (stamp duty for example)

• Late payment fees

Looking beyond the rates

When choosing a home loan, you’ll need to look at more than just the interest and comparison rates. To make sure the loan you apply for is right for your circumstances, there are some other factors to consider:

The amount you are borrowing

How much do you need to borrow? The more you borrow, the more your interest costs will be. 

The term of the loan

How soon can you pay it off? The longer you take to pay off your loan, the more interest you’ll pay.

Fixed vs variable rates

Do you need stability in your repayments, or do you need more flexibility?

Features of the loan

Will you be able to make extra repayments if you wish? Can you have an offset account?

^* You have to be a Qantas Frequent Flyer member to apply for the Qantas Home Loan. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.