When the honeymoon is over
You’ve probably seen the television commercials or maybe the full-page newspaper advertisements. The headline is always the same, a home loan interest rate so low that it’s difficult to ignore.
In a bid to acquire market share from their competitors, lenders are aggressively advertising home loans with very low introductory or ‘honeymoon’ interest rates. But are these attractive loans worth all the hype?
The idea behind these types of loans is simple. They essentially offer a discounted interest rate for a short period of time, normally the first 12 months of the loan.
The catch is that once the honeymoon period is over, the interest rate reverts to a much higher rate, such as the lender’s standard variable rate. These loans may also have excessive fees, making them surprisingly expensive.
Overall, they can cost a borrower hundreds of dollars more each month, or tens of thousands of dollars over the course of the loan.
Savvy borrowers treat introductory-rate home loans with caution as the short-term reprieve rarely makes up for the long-term financial strain.
Introductory-rate home loans can be of value to certain borrowers, such as those who plan to pay off their mortgage during or shortly after the honeymoon period, or those who plan to later switch to a better deal.
But it’s important to be aware of any fees or penalties that may be triggered on such an event.
Your broker is the best person to talk to about whether an introductory-rate home loan is suitable for your specific needs.