Understanding Honeymoon Interest Rates

Ah, the honeymoon phase.

Whether it's in love or loans, it's thought to be a period of bliss.

Home loan honeymoon interest rates, often called introductory discount offers, can reduce the interest rate a new borrower realises at the start of their loan term.

And we all love a saving, right?

But before you dive headfirst into the world of honeymoon interest rates, let's unravel the mysteries behind these tempting offers and uncover what they mean for your financial journey.

What is a honeymoon rate or introductory home loan discount?

A honeymoon interest rate or an introductory offer is a discount promised for a set period of time to people looking to purchase a new home or refinance their existing home loan.

They're normally a defined discount on top of a lender's standard variable rate for a set period of time.

So, a borrower taking advantage of a honeymoon offer could - for instance - pay 1% p.a. less than they would have otherwise for the first year of their mortgage, thanks to an introductory rate.

"An introductory rate would typically be a variable rate," Icon Mortgages managing director Jasjeet Makkar told Your Mortgage.

"It would generally be for the first year or two, and that introductory rate would have certain criteria."

For example, Mr Makkar notes one big four bank previously offered an introductory rate, but only for borrowers purchasing a new home. Those looking to refinance their home loan couldn't take advantage of the offer.

The length of time in which a lender offers an introductory rate can also vary greatly. While some might only promise the discount for the first six months, others might leave it running for three years or longer.

How much could a honeymoon interest rate save you?

It's often easy to forget the impact that a tenth of a percentage point can save a borrower over the life of their mortgage.

For that reason, let's break down the impact that an introductory interest rate discount can have over a 30 year home loan.

What is a typical home loan?

According to data from the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA) encompassing March 2024, the average new home loan is worth slightly over $600,000 and the typical variable interest rate for new loans is 6.3% p.a.

Such a home loan, assuming a 30-year loan term, would demand around $3,700 in monthly repayments and a total of approximately $767,000 in interest.

What impact would a 1% p.a. introductory discount make?

Now that we know what a 'normal' new home loan looks like in 2024, let's factor in the impact of an imagined honeymoon rate.

But what would happen if our very normal borrower were to secure an introductory discount of 1% for the first two years of their loan's life?

Well, it would bring down their minimum repayments to just over $3,300 a month for the honeymoon period, for starters.

It would also see them paying $15,000 less in interest over the life of their loan.

Loan detail	Standard home loan	With 1% honeymoon discount
Loan amount	$600,000	$600,000
Interest rate (p.a.)	6.3%	First 2 years at 5.3%
Monthly repayment (initial period)	$3,700	$3,300
Total interest over 30 years	$767,000	$752,000
Potential interest savings	-	$15,000

Not to mention, if they took the money they saved on monthly repayments over the first two years and used it to make extra repayments, they could shave years off the life of their home loan.

Which banks and lenders offer honeymoon interest rate discounts?

Honeymoon offers or introductory interest rate discounts typically come in floods and droughts.

At any given time, there's usually either multiple to choose from or next-to-none.

"It's hard to predict [how many lenders will offer honeymoon discounts]," Mr Makkar said. "We don't know what the banks feel is the best way to win new customers [at any given time]."

Ultimately, an introductory home loan interest rate offer is a way for a bank or lender to bring in new customers.

But it's one of many ways they can try to entice new business.

When honeymoon offers go out of fashion, banks might turn to cash back deals instead. Or they might simply drop their interest rates to attract new business.

Home loans with introductory interest rate discounts

At the time of writing, these banks and lenders are providing introductory interest rate discounts to eligible new borrowers: 

Pros and cons of introductory home loan discount offers

As with most things in the personal finance space, honeymoon interest rates offer both upsides and downsides, as the table below details.

Pros	Cons
Potential savings on interest payments	Higher interest rates after the honeymoon period
Lower monthly repayments during honeymoon period	Potential for voiding the discount if conditions aren't met
Opportunity to make extra repayments and reduce loan term	Not available from most lenders

What to consider when contemplating a honeymoon interest rate discount

Having considered the upsides to a honeymoon interest rate - the potential savings, of course - it's important to also contemplate the downsides.

"Look at the fees," Mr Makkar said. "See if there's any monthly fee or annual fee you're going to be paying."

Also, consider the interest rate you might face on the expiry of an introductory discount.

That rate - called a revert rate - will be based on the interest rate offered by a lender today and will likely change over the course of an introductory period, but it's worth considering nonetheless.

"At least you can get a fair comparison," Mr Makkar said. "Today, if the revert rate is this, what are other banks offering?"

You might find a home loan product offering an introductory discount rate today doesn't have a competitive ongoing rate for borrowers to roll over to later.

Thus, when a honeymoon rate expires, some borrowers could be left feeling like they've fallen for a 'bait-and-switch' gimmick, even if they haven't.

Lesson #1. Don't get caught up in the introductory rate - do your research on a product's revert rate and fees too

The second most important thing to consider is the terms and conditions set by a lender.

While many banks and lenders stand by their introductory discounts no matter what, others might set conditions that could see the discount voided.

That could result in a borrower losing their discount if they fall behind on their repayments, for instance.

Lesson #2. Read the fine print and consider if a product is right for you

The final factor worth mentioning here relates to lesson #1.

That is, a borrower may be wise to be ready to refinance on the expiry of their introductory interest rate discount.

As mentioned above, most of the products offering honeymoon interest rates aren't among the most competitive on the market when that discount isn't in play.

Refinancing is a relatively simple way to ensure you're getting a good home loan deal at any given time and could potentially save tens of thousands in interest over the life of a loan.

Lesson #3. Be ready to refinance on the expiry of a introductory interest rate

_{Photo by Tatiana Gonzales on Unsplash.}