Interest rate vs comparison rate: What are the differences

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

When you’re comparing home loans, it’s not just about the interest rate. There’s another important factor called the comparison rate that you should consider. A comparison rate takes into account the certain fees associated with the home loan over its lifetime, such as the application/loan processing fee, legal fees, ongoing fees and loan discharge fee. Because these fees are included, the comparison rate is often higher than the interest rate. The purpose of the comparison rate is to provide a more accurate way of comparing different loans. It helps you understand the overall cost of the loan, including the fees involved, in addition to the interest rate.

Why are both these rates important?

Both the interest rate and comparison rate play important roles, depending on the information you need. 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). 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 (i.e. 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 exit fees associated with the loan

Things that 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 it comes to selecting a home loan, it’s essential to look beyond just the interest and comparison rates. To ensure the loan you apply for suits your circumstances, there are some other important factors to consider:

The amount you are borrowing

How much you need to borrow? The more you borrow, the more your interest expense 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 a Qantas Money Home Loan. This website contains general advice only. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.