Why it's best to steer clear of honeymoon rates

By Gerv Tacadena

Honeymoon rates may trap borrowers in a higher interest rate after introductory rate expires.

A honeymoon rate is a wish granted for home buyers who may still have some adjusting to do when it comes to financing their mortgage. However, there is a chance that honeymoon rates may become a dangerous trap that can set borrowers on a bumpy ride.

Also known as an introductory rate, honeymoon rates are a discounted rate at the beginning of a variable home loan, usually for a period of six months to a year. The goal is to give borrowers some breathing room to prepare for the higher rates that will wait after the introductory offer expires.

For industry watcher Sally Tindall, introductory loans are, more often than not, little more than short-sighted quick fixes.

“Don’t get hoodwinked by a honeymoon rate. You’re almost always going to be better off with a low ongoing variable rate with no hidden twists," she told Nestegg.

 As an example, Tindall noted that the lowest honeymoon rate in the market right now is 3.65%, but the rate jumps to 5.17% after the introductory period. Other lenders even have reverted rates as high as 5.7%.

She estimated that borrowers could shell out as much as $33,573 within five years and $140,816 in 30 years after the introductory rates expire.

“The day after the honeymoon is over, reality sinks in and for many people, their loan becomes a very costly financial headache," Tindall said, as quoted by Nestegg.

When considering comparison rates, Tindall said it is important to check the comparison rate.

"If it’s significantly higher than the advertised rate, there’s likely to be a costly catch," she said.

Recently, lenders including the Commonwealth Bank, Westpac Group, and Suncorp, introduced discounts of up to 55 basis points for investors and home buyers on introductory rates in an effort to win back borrowers and drive growth in the sluggish real estate market.

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