Introductory Rate Home Loan

Introductory Rate Home Loans or Honeymoon Home Loans as they are often referred to feature an introductory, honeymoon period, during which borrowers pay a discounted interest rate. This introductory period usually spans 12 months, though some lenders offer the discount for six months and up to 3 years, post which the home loan interest rate reverts to the lenders standard variable interest rate for the loan type.

How does an introductory home loan work?

Introductory Home Loans are offered in two distinct forms:

  1. A Fixed Discount

With the fixed discount option the introductory rate will be a variable rate, which includes a fixed discount on the standard variable rate. So in effect this means that for the introductory period, the discounted rate will move with the market. For example if the standard variable rate is 6% and your introductory discount is 0.5%, your home loan rate for the introductory period will be 5.5%. Should your lender increase their variable rate to 7% your rate will move to 6.5%, carrying forward the 0.5% introductory discount you have for the introductory period.

  1. Discounted Fixed Rate

With the discounted fixed rate option the interest rate is fixed for the introductory period of the home loan, and will not move with the market.

When making a introductory home loan comparison it is imperative that you include the revert or roll over interest rates in conjunction with the discounted introductory rates. These revert rates are the rates that will be applied to your home loan for the period post the introductory period, so potentially up to 30 years, consequently it should be high on your list of considerations.

 

How to compare Introductory Rate Home Loans?

Many introductory rate home loans tend to have limited features to account for the lower rate. And occasionally you may be charged higher a penalty or higher exit fees if you want to refinance within the early years of your home loan. Some lenders place caps on the extra repayments you can pay each month. Some of the key features to consider are:

Extra Repayment Caps - Some lenders include a ‘cap value’ on the dollar value of extra repayments you can make during the introductory period. Given this is the period during which you may have spare cash to use for extra repayments, due to savings in interest charges, you should assess if the caps will prohibit you from making your desired level of additional payments  

Early Exit Fees - Exit fees are charged by lenders at varying times during home loans. In terms of introductory home loans it is common for a fee to be payable if you payout or refinance your home loan during the introductory period.

Establishment charges and ongoing fees - Introductory rate Home Loans often feature fees that are at the higher end of the range, so be sure to include these in your calculations when establishing any savings you may make by selecting an introductory rate home loan.

Repayment Options - The flexibility of repayment options may be limited with Introductory rate home loans, so if weekly or fortnightly repayments are important to you be sure to check that these are offered as they are not a given across this loan type.  

         

Pro’s and Cons of an Introductory Rate Home Loan

Pro’s

  • The early repayments on your home loan are at a lower level that eases you into the repayment cycle and discipline of repaying a home loan.
  • With all the cost associated with buying a home these lower repayments can be a welcome respite as you get your finances back to a more predictable cycle

Con’s

  • At the end of the introductory period your interest rate is likely to revert to a higher rate resulting in higher repayments
  • The Exit fees are high should you choose to repay your mortgage or refinance during the introductory period.