Q. I have been hearing the term ‘honeymoon interest rates’ a lot while looking for a home loan. What exactly does it mean? What are the benefits and do they outweigh any negatives?
A. There are a few home loan terms used by lenders to help draw in borrowers and a honeymoon interest rate is one example. A honeymoon or introductory rate is often much lower than the lender’s other home loan products. However, this low rate only lasts for a certain amount of time. This type of rate does have pros and cons. Many first home buyers find the honeymoon rate gives them a chance to ease into the repayments and learn how their mortgage works. Other borrowers use this time to make extra repayments so that they are not only prepared for when the rates revert back, but they also put extra money towards their loan.
However, although you may be saving money initially on repayments, when this honeymoon period ends, you may be stuck with a rate that is not as competitive in the market. Also, some lenders could charge early termination fees, so if you do wish to change lenders; it will cost you a lot more.
The best thing you can do is do your research and speak with lenders before handing in an application form. Find out what the interest rate will revert back to and also what fees they charge. You may find that a honeymoon rate is worth having or you may find a more competitive home loan with a variable or fixed rate.