Honeymoon or introductory rate home loans
Among the many home loan options available, many lenders are now offering home loans with a low introductory interest rate. These have become known as honeymoon rate home loans.
Many borrowers find the idea attractive, as the honeymoon rate home loan offers a substantially lower interest rate for a set introductory period of around six to twelve months. After this initial term is completed, the interest rate generally reverts to the standard variable rate offered by that lender.
The length of the introductory rate, the introductory interest rate itself and the interest rate you pay once the initial period ends, depends on your chosen lender. It's worth shopping around, as different lenders offer substantially different honeymoon rate products .
Who can benefit from a honeymoon rate?
Honeymoon rate home loans can offer significant savings . Not only can you save on interest payments over the initial period, but these savings can then offer longer term reductions, as Martin and Clair discovered.
Martin and Claire chose a honeymoon rate home loan for their new house. Their honeymoon period was for one year with an attractive interest rate of 6.25%. After the initial honeymoon period, the interest rate reverted back to their lender's standard variable rate of 7.25%.
In that first year, Martin and Claire elected to make repayments on their loan as if they were paying the higher interest rate. By doing this, not only were they prepared for the rise in repayments after the first year, the extra money paid each fortnight had brought down the principal of the loan as well. This resulted in a significant reduction in the required interest payments after the introductory period had finished.
Martin and Claire were now making additional repayments on their home loan, without changing their budget, resulting in substantial savings over the term of their loan.
For other people, a lower introductory interest rate can mean lower repayments for the initial period, and more funds available for other expenses, such as buying furniture for a new home.
What should I look out for?
Honeymoon rates are tempting, but watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the available features to offset the lower interest rate . This can result in limited flexibility over the term of the loan.
Many introductory rate loans also have higher early repayment or exit fees, especially within the first four or five years following the initial period. Higher establishment and ongoing fees can also add up. Some lenders even cap the amount that can be repaid each month during the introductory period.
If you're considering taking out a home loan with an introductory or honeymoon rate, make sure you research all your options first. You may find that by sacrificing a temporary saving in repayments, you'll end up with a home loan with more flexibility, more features and lower overall fees. Or you might find that a low introductory rate will provide the breathing space you need in the first 6-12 months of your home loan.