Buying a home can be rather expensive when you consider the costs involved and the expenses are at their peak during the first few years of home ownership.
A honeymoon rate, or an introductory rate, is a special interest rate discount offered on some home loan packages for a short period at the beginning of your mortgage which can reduce your mortgage repayments.
The honeymoon rate term is usually for the first 6 to 12 months and with the little bit of relief you get, good savers can use the extra savings buy furniture, appliances, renovate their new property or even pay off other debts.
Despite the benefits of an introductory rate, there are some important things to keep in mind if you decide to sign up.
What does a honeymoon rate offer?
The basic idea of a honeymoon rate is to provide a bit of relief for home buyers during their first year of home ownership.
Your overall debt is reduced because you’re paying a lower interest rate in the first year.
If you’re able to make extra repayments in the first year, those extra repayments go directly towards paying down your principal, which means you pay less back in interest over the long term and, ultimately, pay off your home loan faster!
What’s the catch with introductory rates?
While honeymoon rates give you a bit of breathing room during the first year as you get used to your new financial commitment, there are a few things you need to consider.
Simply speaking, banks offer first home buyers a cheaper rate in the first year as bait to get you hooked with their products and services. The thing is that you really need to consider your ongoing interest rate, not just the rate during the introductory period.
Some lenders will revert your interest rate back to the Bank Standard Variable Rate (BSVR rate) after the introductory rate period. They may then refuse to give you a discount later on!
If you’re looking to refinance or repay the home loan early within the first few years then you’ll often be charged some sort of penalty or break cost. Every lender has their own rules regarding the penalty for paying off your mortgage early or for refinancing within the fixed term.
It’s important to check the terms and conditions carefully or speak with your lender or mortgage broker after the honeymoon period has expired!
What other features are available?
- Honeymoon rates are the lowest rates you can find: Compared to standard interest rates offered on other home loans, a honeymoon rate can be very attractive. However, these rates only last for a short period, usually between 6 to 12 months.
- Fixed discount honeymoon rates: With this type of mortgage arrangement, the interest rate will remain variable but it will be capped at a certain discount rate below the bank’s standard variable rate. This means that although the interest rate on your home loan will fluctuate with the market, it will remain discounted.
- Extra repayments may be capped during honeymoon period: In most cases, lenders will cap the amount or value of additional repayments you can make during the honeymoon period.
- Exit fees may be applicable if you decide to refinance: If you’re looking to refinance during the introductory rate period then you’ll likely be charged a substantial exit fee.
- The interest rate will revert to the bank’s standard variable rate: After the introductory period ends, the interest rate will revert back to the BSVR rate. In fact, it can sometimes go even higher than the standard variable rate!
Is it the best choice for me?
As a specialist product, the most attractive feature of a honeymoon rate is undoubtedly the low introductory rate. However, it’s suitability depends on your situation.
For instance, it’s more suitable for home loans at a high LVR (Loan to Value Ratio), which is the amount that you’re borrowing compared to the value of the property you’re looking to borrow, expressed as a percentage.
Typically, people looking to get a 95% LVR home loan would save a lot with an introductory interest rate.
When should I avoid it?
It would be better not to go for a honeymoon rate if you already have a large deposit saved.
In this situation, you or your mortgage broker are in a better position to negotiate a very low interest rate deal anyway. On top of that, the interest will last longer than just 6 to 12 months!
To find out if honeymoon rates are right for you, consider:
- Reading the terms and conditions thoroughly before selecting a lender.
- Comparing and calculating home loan products offered by a number of different lenders and choose the one that is right for you in the long term.
- Getting a mortgage broker to do the hard work for you.
Depending on your situation, a honeymoon rate may be a great solution which can make your home loan experience a lot easier during the first year.
Our specialist mortgage brokers can help you to find the lowest interest rates available from our panel of over 40 lenders.
Call us on 1800 889 743 or complete our free assessment form today!