What is a comparison rate?

What is a comparison rate?

A comparison rate is most simply described as the true cost of your loan. If you've ever found yourself in a position where you're comparing home loans to try and find the right deal, the numbers you are comparing are in fact, comparison rates. While it's easy to get caught up in an attractive interest rate, it's important to know that interest is not the only cost of borrowing.

This figure, displayed as a percentage, comes from a number of different variables. While it is largely based on the interest rate, other factors include:

• the amount you are borrowing
• the time it will take for you to pay it back
• how often you are making repayments
• fees and charges related to establishing the loan.

All of this is condensed into the comparison rate so that you know exactly what the home loan will cost you.

It's a legal requirement that all lenders display a comparison rate next to the interest rates they advertise. Understanding the comparison rate is akin to reading the fine print. While a sound interest rate can certainly be attractive, it's the comparison rate you need to be looking at if you want to get the full picture.