Are ‘Honeymoon’ interest rate loans a good idea for first home buyers?
Honeymoon rate home loans are also known as introductory rate home loans because banks often tempt you with a low rate for the initial period of your first home loan. The jury is still out as to whether these are a good idea for first timers. In this special feature, we take a look into the pros and cons of honeymoon rate home loans.
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Recently, honeymoon rate offers have become increasingly popular amongst Australian lenders as they strive to entice more customers whilst maintaining the profits they earn from each customer over the life of the loan. They can have the impact of reducing the financial burden of home ownership, however, there are also some risks first home buyers should be aware of when deciding to take up a honeymoon or introductory rate.
What is a honeymoon/introductory rate home loan?
A honeymoon/introductory rate home loan offers you a discounted rate on the standard rates the banks are currently offering, usually for a year or a number of years. The introductory interest rate can either be a fixed or variable rate and once the honeymoon period is over the rate reverts to the standard variable rate, which may be considerably higher than the discounted rate.
Advantages of honeymoon/introductory rate home loans
– First home buyers enjoy lower repayments for the initial period of their mortgage life
– First home buyers can take advantage of lower repayments by getting ahead in their home loan through making extra repayments
– Most introductory rate products usually come with no upfront or establishment fees
– Most lenders will provide a redraw facility with the introductory rate products, allowing additional repayments into the loan
– Most introductory rates are even available for those with low deposits i.e. 5-10% deposits
– Once the honeymoon period is over, first home buyers can look at options of refinancing internally with the same lender or another lender (provided the break costs are minimal)
Disadvantages of honeymoon/introductory rate home loans
– The rate you revert to will usually be significantly higher than the introductory/honeymoon rate, sometimes up to 1% higher, meaning the repayments will be significantly higher after the honeymoon rate period is over
– No offset account is provided with most introductory products (as lenders don’t want to give you everything!)
– The break/exit costs may be significantly higher than if you were breaking a standard home loan product
– First home buyers with low deposits may face the reality of being locked in with a particular lender, as they may not be able to look at other options due to equity not being available
– First home buyers may not get all the features that a standard home loan product offers due to the benefit of the lower rates the lenders are already providing
What are some of the introductory rates currently on offer?
Lenders are currently offering a wide variety of introductory or honeymoon interest rate offers and some exclusive to first home buyers. Some of the more tempting offers at the time of writing (July 2018) include:
– 2-year introductory variable rate of 3.59% for buyers looking to borrow up to 95% of the property purchase price. The rate reverts to 4,59% after the 2 year period
– 3-year introductory variable rate of 3.50% for first home buyers only with a 20% deposit. The rate reverts to 4.90% after the 3 year period
– 4-year introductory variable rate of 3.79% for first home buyers only with a deposit of at least 5%. The rate will then revert to a the Standard variable rate less 0.10% discount
– 5-year introductory variable rate of 3.79% for first home buyers only with a deposit of at least 5%. After the 5 year period, the rate reverts to a variable rate of 4.59%
The above are just some of the current specials on offer. Everyone’s circumstance is different, therefore it is worthwhile getting in touch with an FHBA Broker/Coach at FHBA Mortgages, who will explore and compare a range of options for you at no charge to you. This will save your time in searching for the lowest rate and the most suitable product.
First Home Buyers Australia