Editor's choice

By Nila Sweeney

Introductory loans

While the comparison rate can be a useful tool, Your Mortgage has gone even further and developed its own method to uncover the true cost of a mortgage. We show you how you could save $31,305 over 10 years on your introductory loan

Honeymoon loans, also referred to as introductory loans, or sometimes as discount or special offers, are usually only offered to new borrowers, meaning that someone who already has a loan with the lender isn't eligible. The loan has a low initial interest rate which usually lasts for a period of one year; however, some lenders are now offering a longer introductory period of up to three years.
There are many critics of honeymoon rates who argue that they don't represent good value. They say that these loans lure customers in, then after the initial period, charge them an uncompetitive interest rate. This isn't necessarily the case, as we've found in this month's Editor's Choice competition. In some instances, the honeymoon period can be seen as a bonus period prior to the borrower moving on to a competitive loan. However, with a number of loans, the criticism is justified.
It's inaccurate to say that all the honeymoon loans on offer represent poor value. Each loan needs to be evaluated, always keeping the borrower's specific circumstances in mind.

Fixed or variable?
Introductory home loans can have a fixed or variable interest rate.
If the interest rate is fixed, it can't change during the introductory period. So, if the rate is 5.5% it will remain so until the end of the introductory offer.Some introductory loans have a variable interest rate. The interest rate is usually set at a margin below another of the lender's loans, often their standard variable loan. For example, an introductory loan could be set at 1% below the standard variable loan.
If, during the borrower's introductory period, the standard variable loan increased by 0.5% so would the introductory interest rate.

How about the longer term?
Introductory loans can appear attractive but it's important to remember that you'll have the loan for a lot longer than one year. A relatively low rate for one year followed by a relatively high rate for 24 years may not be the best offer available. It's important to consider the cost for the full term of the loan.

The bigger picture
Generally, after the introductory period the borrower moves onto what's referred to as the lender's standard variable loan. What exactly constitutes a standard variable loan is a murky issue.
Five years ago, most lenders only offered one variable home loan and a similar loan with a higher interest rate and less attractive terms and conditions for residential property investors. Many institutions now have several variable home loan interest rates and classifying one as the standard variable loan is a difficult process.
There's a significant difference between the loans that the introductory offers roll to. Not only do the interest rates differ but the terms and conditions and level of repayment flexibility also vary substantially.

Beware of exit fees
Another important point to keep in mind when considering introductory loans is that the lender is generally not going to let you get out of the loan at the end of the introductory period without charging a significant penalty.Borrowers trying to exit a loan at the end of the introductory period, or shortly after it, can be charged a fixed amount, for example $600. Some lenders charge a percentage of the original loan amount, for example, 2.5% of the original loan amount, if the loan is exited within the first two years.
Borrowers planning to take advantageof the honeymoon rate then get out of the loan should look into this carefully before they enter the loan. Getting out after the introductory period is unlikely to be a financially painless process.

And the winner is...
Colonial branded products of CBA Basic Variable 3 Year Rate Saver has emerged as the best value introductory loan in the banking category thanks to its low interestrate of just 5.06%.
The product, which has a 36-month introductory period has also one of the longest intro periods currently being offered by Australian lenders.
After three years, the CBA product saves borrowers $6,270 compared to the average cost of the loan in our database.
Over five years, borrowers are poised tosave $11,794 and $25,424 over 10 years.
RAMS Home Loans Rate Relief has won the best value introductory loan in the non-bank category, being boosted by a potent combination of low rates and low fees.
Over a three-year period, the RAMS Rate Relief loan could save borrowers $10,273 compared to the average home loan in our books. Over five years, this savings rises to $16,426 - and over 10 years, borrowers could save up to a whopping $31,305 compared to the cost of the average loan in our database.

A closer look
One of the biggest advantages of the winning bank product - Colonial branded products of CBA Basic Variable 3 Year Rate Saver - is the low reversion rate,the interest rate by which the mortgage would change over to after the introductory period ends.
At 5.23%,the product currently offers the lowest reversion rate of all the bank productson offer in this type of loan.

While the deferred establishment fee - the cost incurred when you pay off your mortgage early - is quite high at $1,000, the upfront fee of $700 and $8
monthly fee is largely in line with the other lenders.
The product allows borrowers to make extra repayments and offers the ability to redraw the extra funds at a later date.
However, those who choose the interestonly option won't be able to use the redraw facility. The loan is portable and can be used as a construction loan when building a home.

Like the CBA product, RAMS Rate Relief loan offers the lowest reversion rate of all the top ranking non-bank introductory loans.
At 5.29% after thetwo-year introductory period, the loan offers the highest savings over the fiveyear and 10-year category.
Borrowers need to look out for the cost however. The RAMS Rate Relief carries an $845 upfront fee and a hefty $1,795 deferred establishment fee if the loan is paid off within three years. Nevertheless, the product still offers the highest savings when all other elements such as the length of intro period, the revert rate and nil account keeping fees are taken into consideration.
Borrowers can borrow up to 100% of the purchase price subject to serviceability. Flexible features such as extra repayments with a minimum of $2,000 are also allowed, as well as redraw access to overpayments with a minimum amount of $1,000. YM