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Mark BristowMark BristowOct 29, 2021(2 min read)

A lot of Australians compare home loans using the advertised interest rate, which indicates how much interest you’ll be charged on your mortgage repayments. The lower your rate, the cheaper your home loan should be.

However, interest charges aren’t the only cost associated with home loans. Most mortgage lenders also charge fees on their home loans. A mortgage with a low interest rate and high fees can sometimes cost more than a mortgage with a high interest rate and low fees.

A home loan’s comparison rate combines the cost of interest with the cost of standard fees and charges into a single percentage rate. Mortgage lenders are required to display a comparison rate alongside their advertised rate to better indicate the home loan’s overall cost.

Keep in mind that to ensure consistency, all comparison rates are calculated assuming a $150,000 principal and interest mortgage with a 25 year term. As your home loan may be different, the comparison rate may not accurately reflect exactly how much your home loan may cost. Also, the comparison rate doesn’t include every home loan fee and charge, so it’s still important to compare home loans and read the fine print before you apply.

Related FAQ's

How do you compare home loans?

To compare home loans, you can assess the components of the loan against your own financial situation and other mortgages in the market.

Look at the interest rate, rate type (fixed or variable), loan fees, features, loan term, repayment frequency and more to find a home loan that fits with your budget and property goals.

Then, use comparison tools like comparison tables, calculators, or RateCity's Real Time RatingsTM to create a short list of home loan options, and decide which home loan best suits your needs.

Do you compare mortgages using the comparison or advertised rate?

A lot of Australians compare home loans using the advertised interest rate, which indicates how much interest you’ll be charged on your mortgage repayments. The lower your rate, the cheaper your home loan should be.

However, interest charges aren’t the only cost associated with home loans. Most mortgage lenders also charge fees on their home loans. A mortgage with a low interest rate and high fees can sometimes cost more than a mortgage with a high interest rate and low fees.

A home loan’s comparison rate combines the cost of interest with the cost of standard fees and charges into a single percentage rate. Mortgage lenders are required to display a comparison rate alongside their advertised rate to better indicate the home loan’s overall cost.

Keep in mind that to ensure consistency, all comparison rates are calculated assuming a $150,000 principal and interest mortgage with a 25 year term. As your home loan may be different, the comparison rate may not accurately reflect exactly how much your home loan may cost. Also, the comparison rate doesn’t include every home loan fee and charge, so it’s still important to compare home loans and read the fine print before you apply.

What is a mortgage rate?

The interest rate on a home loan is sometimes called the mortgage rate. This percentage indicates how much interest the lender will charge you with each home loan repayment. Your interest rate is effectively the “cost” of “buying” the money you’re using to buy a property – the higher your mortgage rate, the more your home loan repayments may cost.

Using a home loan calculator, you can estimate how much your home loan repayments may cost, based on your mortgage rate, loan term, and loan amount. This may also be affected by whether you’re making principal and interest repayments or interest-only repayments, if you have a fixed rate or variable rate mortgage, and any fees and other charges that may apply.

Is the lowest home loan rate always the cheapest?

The home loan with the lowest interest rate may not always be the cheapest mortgage option for you. Sometimes a home loan with a low interest rate may charge high fees, which may cost more in total than a mortgage with a higher interest rate and no fees.

Consider checking the comparison rate, which combines interest and standard fees, to get a better idea of the overall cost of different home loan options.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

If a mortgage rate changes, will it affect your repayments?

If you have a variable rate home loan, changes to your mortgage rate may affect the cost of your repayments. Rising interest rate could cost you more in interest charges, while interest rate cuts could see you paying less interest on your home loan.

If you have a fixed rate home loan, your interest charges will stay the same during the fixed interest period, regardless of whether the lender’s variable rates rise or fall. Once the fixed rate term expires, your loan will revert to a variable rate, so be prepared in case of bill shock.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.