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You must have seen an advertisement for home loans like this.

What is the comparison rate? Do you pay a comparison rate?

As its name suggests, the comparison rate is designed to attempt to compare different home loans with a simple interest rate.

But it actually causes more confusion than clarity.

Comparison Rate = Annual Rate + Fees + Charges

All loans come with fees and charges, besides interest rates. Those fees and charges include establishment cost, on-going fees and discharge cost. You can't just compare two loans with their interest rates because you must also take the fees and charges into consideration. A comparison rate is a tool designed for this purpose. To make it a uniform formula, comparison rate takes the loan of $150,000 over 25 year term as the sample.

Here are examples of comparison rates of home loans with the same interest rate, but different fees and charges:

Comparison rate for a loan of $150,000 and 25 year term:

 You can see that it's the on-going fee that affects the actual cost of a loan the most.

However, here come the problems.

First of all, the actual effect of the fees and charges on loans varies according to the loan amount.

If we change the loan amount to $600,000, the comparison rates will change accordingly as the below table shows:

The larger the loan amount is, the less sensitive is to fees and charges.

Also, comparison rates don't take loan type and features into account, such as offset account. Just looking at the comparison rate, you may compare apple with an orange.

Instead of using comparison rates blindly, we adopt the concept of Actual Loan Cost, which incorporates interest rates, fees charges based on your loan amount, to give you a more accurate comparison for different loan options.

With the right tools and resources, your credit adviser will make the loan selection process nice and easy for you.