How to Compare Home Loan Interest Rates
Shopping for a home loan based on advertised interest rates alone is one of the most common mistakes Australian borrowers make. Two loans with the same headline rate can cost you vastly different amounts over their lifetime once fees, features, and conditions are factored in. Here is how to compare home loans properly.
Advertised Rate vs Comparison Rate
Every home loan in Australia must display both an advertised rate and a comparison rate. Understanding the difference is crucial:
- Advertised rate: The headline interest rate. This is what the lender markets and what your repayments are calculated on
- Comparison rate: Includes the advertised rate plus most standard fees and charges, expressed as a single percentage. This gives you a truer picture of the total cost
For example, a loan with a 5.99 per cent advertised rate and $395 annual fee might have a comparison rate of 6.08 per cent, while a loan with 6.09 per cent and no fees has a comparison rate of 6.09 per cent. The second loan is actually more expensive despite the higher headline rate being lower in comparison.
Fees That Matter
- Application or establishment fee: $0 to $600 upfront. Many lenders waive this for competitive applications
- Annual or monthly fee: $0 to $395 per year. This ongoing cost adds up significantly over a 25 to 30 year loan
- Discharge fee: $150 to $400 when you close or refinance the loan
- Early repayment fee: Some loans penalise you for paying off your loan early
- Redraw fee: Some lenders charge to access extra repayments you have made
Features Worth Paying For
A slightly higher rate with the right features can save you more than a rock-bottom rate with no flexibility:
- Offset account: A transaction account linked to your loan where the balance reduces the interest you pay. A $50,000 offset balance on a $600,000 loan at 6 per cent saves about $3,000 per year in interest
- Extra repayments: The ability to pay more than the minimum. Even an extra $200 per month on a $500,000 loan can cut 4 to 5 years off your loan term
- Redraw facility: Access to extra repayments you have made if you need them
- Repayment flexibility: Ability to switch between weekly, fortnightly, and monthly payments
- Rate lock: Lock in the rate between approval and settlement (usually 60 to 90 days)
What to Watch Out For
- Honeymoon rates: Ultra-low introductory rates that revert to a much higher rate after 1 to 2 years. Calculate the cost over the full loan term, not just the introductory period
- Package deals: Some lenders bundle home loans with credit cards, insurance, and transaction accounts. Check whether the package fee ($395/year is common) actually saves you money versus standalone products
- Cashback offers: A $3,000 cashback sounds appealing but check the ongoing rate. If it is 0.1 per cent higher than a competitor, you lose the cashback benefit within 5 years on a $600,000 loan
The Best Way to Compare
The most effective way to compare home loans is to talk to a mortgage broker. They can calculate the true cost of each option based on your specific loan amount, term, and usage patterns, including features like offset accounts that comparison rates do not reflect. Visit our rates page to see current rates from major lenders, or find a broker near you to get personalised recommendations.