What is a comparison rate?

The comparison rate rolls most fees into one yearly figure, worked out on a standard loan. That is how a lower headline rate can still cost more.

For home loans secured by a mortgage, the comparison rate is worked out on a loan of over 25 years. That standard comes from regulation 97 of the National Consumer Credit Protection Regulations 2010.

It combines the interest rate with most upfront and ongoing fees. Some costs and savings are left out, which is why every comparison rate carries a warning.

The required wording reads: "This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan."

Here is a worked example on over 25 years. Both rates are example rates, and the fees were chosen to show the effect, not taken from any lender.

Loan A has an example rate of 6.09% a year and no fees. Its repayment is a month, and its comparison rate is also 6.09%.

Loan B has a lower example rate of 5.89% a year, with upfront and a month in fees. Its repayment including the fee is a month, yet its comparison rate is about 6.14%, higher than Loan A.

The comparison rate tests every home loan on the same over 25 years, whatever the house costs. Your own loan will be a different size, so its real cost will differ too.