Advertised Rate vs Comparison Rate:

When seeking a home loan, you’ll see two main numbers: the advertised interest rate and the comparison rate. Both indicate the loan’s cost but mean different things. This article clarifies each rate, its calculations, the rules, and their implications. We’ll discuss why banks may show a low advertised rate paired with a higher comparison rate (or vice versa), how loan features affect these rates, and share practical tips for consumers and educators.

The advertised interest rate (sometimes called the "headline rate") is the basic percentage rate that lenders promote in marketing materials. This percentage represents the cost you pay each year to borrow money. The advertised rate does not include any additional fees or charges that you may incur.

The comparison rate gives a broader view of a loan’s true cost by combining the interest rate with most fees over the term. It’s a single percentage reflecting the annual total cost, based on a set loan amount and term.

In Australia, the comparison rate calculation is standardised under the National Credit Code (NCC) and related regulations. The calculation assumes:

• A fixed loan amount and term (usually $150,000 over 25 years for home loans)
• This includes the nominal interest rate, which is the stated percentage paid on the loan, plus most fees and charges you pay over the life of the loan.
• Exclusion of certain fees, such as government charges and conditional fees (e.g., early repayment fees)

For example, a lender might advertise a nominal interest rate of 5.49%, but the comparison rate could be higher, such as 5.75%, reflecting additional ongoing fees and charges.

The comparison rate thus serves as a standardised metric enabling consumers to compare the real cost of different loan products more effectively.

Included fees and charges:

Excluded fees and charges:

This method provides a realistic representation of most costs and avoids distorting the comparison rate with rare or one-time fees.

By including most fees, comparison rates help you spot loans that look cheap at first but have hidden costs. Still, since some fees aren’t included, you should check the product disclosure statement to see all possible charges.

Example:

• Loan amount: $150,000
• Term: 25 years
• Nominal interest rate: 5%
• Application fee: $1,000
• Monthly service fee: $10

When you spread the fees over the life of the loan and add them to the interest, you might get a comparison rate of 5.5%. This means the loan actually costs more than the headline rate alone would suggest.

Comparison rates vary significantly between loan types due to differences in interest rates, fees, loan terms, and risk profiles.

Banks’ advertising strategies reflect market positioning and regulatory constraints:

• A low headline rate and a higher comparison rate attract attention and ensure compliance, indicating higher fees or features that increase the total cost.
• A higher headline rate with a lower comparison rate suggests fewer fees or simpler loan features, appealing to informed consumers focused on total cost.

Banks compete, meet customer demand, and comply with rules without misleading ads.

Effect of Fixed vs Variable interest rates on comparison rates

The type of interest rate significantly influences the calculation and practical usefulness of comparison rates.

• Fixed-interest-rate loans have a locked-in rate for the term, making comparison rates more stable and predictive of the total cost.
• Variable-rate loans fluctuate with market and central bank rates, resulting in variable payment amounts over time.

Since comparison rates assume the interest rate remains the same, they may not accurately reflect the actual cost of variable loans, which can fluctuate over time.

Influence of loan features like offset accounts and redraw facilities

Loan features that offer repayment flexibility or interest savings are often not fully accounted for in comparison rates.

Because comparison rates don’t include these extra features, you may view some loans as more expensive than they actually are. If you use these features, the comparison rate may not accurately reflect your actual costs.

While comparison rates improve transparency, they have limitations:

Use comparison rates as a helpful starting point, but also consider your own situation and the loan’s features, and read all the details carefully before choosing a loan.

In Australia, disclosure of advertised and comparison rates is governed chiefly by:

• The National Consumer Credit Protection Act 2009 (National Credit Act), particularly Part 10 of the National Credit Code, requires the inclusion of comparison rates in advertisements for fixed-term loans intended for personal/domestic use.
• ASIC’s Regulatory Guide 234 outlines best practices for advertising financial products, calling for clear, truthful, and non-misleading rate disclosures, as well as mandatory comparison rate warnings.
• The Australian Competition and Consumer Commission (ACCC) enforces advertising standards under Australian Consumer Law against misleading conduct and deceptive advertising.

Recent years have seen increased regulatory scrutiny to enhance transparency and consumer protection:

• ASIC has updated regulatory guides and intensified enforcement against misleading advertising.
• The ACCC has issued infringement notices to banks for inaccurate disclosures, aiming to improve data quality.
• New guidance under the Delivering Better Financial Outcomes Act 2024 encourages clearer disclosures, including flagging deferred fees.

These steps have prompted lenders to prominently display comparison rates alongside advertised rates, thereby helping to reduce consumer confusion and improve market fairness.

ASIC mandates:

• Calculate comparison rates using the National Credit Code’s method, factoring in interest plus most fees.
• Accompanied by a comparison rate with a clear warning stating it is indicative only and specific to the example advertised.
• Prominent, legible display of comparison rates alongside headline rates in all advertisements.
• Exclusion of certain fees (government, early repayment) from the calculation, but disclosure of those fees elsewhere.

These rules maintain consistency, reduce confusion, and support better decisions.

Banks often advertise low headline rates paired with higher comparison rates for strategic reasons:

• The low headline rate captures consumer attention and generates inquiries due to its psychological appeal.
• The comparison rate, which includes fees, ensures compliance and transparency.
• By showing both rates, banks can market their loans effectively while also acting responsibly, building trust, and avoiding regulatory breaches.

Some lenders may also advertise higher headline rates with lower comparison rates when fees are minimal, appealing to savvy consumers who focus on total costs.

Regulatory guidelines and industry best practices recommend:

• Prominent, bold display of the headline interest rate to attract initial attention.
• Clearly display the comparison rate, including any required warnings.
• Never hide comparison rates in small print.
• Use of plain language and transparent fee disclosures.
• Maintain consistent messaging across all channels to minimize confusion.

While regulations help transparency, challenges remain: Drip pricing can mislead consumers.

• Vulnerable consumers, including non-English speakers, still face difficulties understanding rates.
• Enforcement actions and consumer education are ongoing to address these gaps.

Current practices are a good start, but clearer consumer communication is still needed.

• Many consumers focus on headline rates and overlook comparison rates.
• Vulnerable groups (younger people, females, non-English speakers) have lower comprehension and face more financial difficulties.
• Consumers often do not fully appreciate the impact of fees and loan features on total cost.

Regulators and consumer groups employ:

• Plain language educational materials explaining comparison rates.
• Enforcement actions to ensure truthful advertising.
• Tailored messaging and outreach to vulnerable demographics.
• Tools like calculators and interactive guides on platforms such as ASIC’s MoneySmart.

Data-driven personalisation and behavioural insights help:

• Tailor messages to demographic-specific cognitive biases.
• Use natural language processing to analyse and optimise messaging.
• Highlight total loan costs clearly, avoiding jargon.
• Reinforce the importance of comparison rates in decision-making.