What you need to know about honeymoon home loans

By Gerv Tacadena
A couple relaxing in their new home, financed with a honeymoon rate

Buying your first home takes a prepared mind in addition to a prepared pocket. For first-time homebuyers, the responsibility of having to pay a monthly mortgage can be daunting, but thanks to honeymoon loans, you can take advantage of a significant buffer that eases the financial pressure.

Honeymoon home loans are an arrangement that allows for a temporary reduction of interest rates for a period of time at the start of your mortgage – usually ranging from six months to a year. This reduced interest rate, sometimes also called an introductory rate or honeymoon interest rate, is designed to entice prospective home buyers who may be hesitant to take on a home debt.

Borrowers who avail themselves of honeymoon loans can expect an average reduction of around 0.5% to 1% from the standard variable rate (SVR) of the loan provider. And, as the term implies, this honeymoon rate lasts for a certain period of time – once the period ends the interest rate reverts to the providers' standard rate.

A honeymoon interest rate will either come as a "fixed discount" or a "discounted fixed rate." The former is a rate that will go with the market, meaning it is fixed at a certain level or margin below the SVR. This type of introductory rate follows the movement of the standard variable rate. The latter is rate that stays the same for the entire honeymoon period and is not dependant on the movement of SVR.

In most cases, the introductory rate loan will bear the same features with the loan it will revert to at the end of the honeymoon period.

Australian banks adopted this concept in the early 1990s. While honeymoon loans are not as popular currently as they have been in the past, they remain an option worth exploring for borrowers looking to enter the market.

Upsides of introductory rates

As mentioned earlier, a honeymoon loan allows you to take baby steps in your mortgage payments, helping you build your financial capability during the early stage of your home ownership.

Perhaps the biggest benefit borrowers can get from this option is the potential freedom to slash their debt substantially without having to burden your pockets too much. If you are allowed to make overpayments you can make significantly reduce the principle of the loan, helping you settle the debt earlier as planned. You just have to make sure that the lender allows such extra payments.

You can also use the savings you get from the lower interest rate to beef up your emergency fund or allocate it for small renovations and furnishings.

Disadvantages of honeymoon interest rate

Of course, it's possible that honeymoon interest rates may not be a good fit. For one, while a borrower could save on interest during the beginning of their mortgage, they could be locked into an interest rate that is not as competitive as others currently in the market for the rest of the duration.

This is why it pays to do research before signing application forms – you have to make sure that the revert rate is not so high that it eats away the savings you accrued during the honeymoon period.

Additionally, you have to be aware of certain fees that you may encounter in the course of your loan. Some lenders charge borrowers if they refinance their loans (or repay it entirely) during the early years of the deal. Exit fees vary amongst lenders, with some imposing a flat rate while others charging a percentage of the loan amount at the time of the discharge.

You may also bear a switch fee if you choose to revert to a fixed rate instead of the SVR after the introductory period. Similar to the exit fee, the switch fee may depend on the terms set by the lender.

Many believe that honeymoon loans support band spending habits, and borrowers can often act as if the introductory period will last forever. This is apparent in first-time homebuyers who may not be able to make the most out of the entire low-interest rate period.

Will this be suitable for you?

In general, finding the best loan product to suit your needs takes careful planning and consideration. And, while it's true that introductory rates are available for those making their second or third home purchase, first-time homebuyers are usually the ones who can maximise the benefits of this route.

In order for you to make the most out of honeymoon rates, talking to your lending institution and discussing in detail the particulars – how high the revert rate will be, the fees and charges that may apply for early termination, and the features of the loan that you can use to your advantage – are a must.

Lastly, the most important thing for borrowers who do decide to use honeymoon loans is to be prudent and wise in using the savings you'll receive during the honeymoon period.

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