How to avoid extra honeymoon rate baggage
In the marriage with your mortgage, the "honeymoon period" can quite often be the most exciting in terms of low interest rates. Often referred to as the "introductory period" or the "honeymoon rate", borrowers find the idea attractive as the loan offers a substantially low rate for periods between 6 months to 3 years. After the initial term is completed the rate reverts to the standard variable which is generally higher than the introductory rate.
The "honeymoon" period can be great for those on a tight budget wanting a little space to move with regards to payments. The "discount" in the initial period could help with the purchase of furniture or other financial commitments.
The length of the introductory rate, the introductory interest rate itself and the interest rate you pay once the initial period ends, depends on your chosen lender. It's worth shopping around, as different lenders offer substantially different honeymoon rate products.
However, all that glitters is hardly gold. Honeymoon rates do come with baggage attached. Exit fees during the "honeymoon" period tend to be higher than a traditional loan. There are restrictions in terms of the additional payments you are allowed to make toward your mortgage. Redraw facilities may or may not be available either. The reason people take out an introductory rate is to ease the burden of payments in the initial year of the loan. If your aim is to pay as much as you can in the initial years, a honeymoon rate may not be appropriate for you.
A few questions to consider before you board the honeymoon wagon-
- What is the effective rate of the loan or the AAPR?
- Does the initial low rate revert to the standard rate or to a special higher rate after the honeymoon period?
- Are there higher upfront or ongoing fees?
- Can you pay out the loan (through refinancing) after the one year period or will you be charged a break cost? (Some loans will charge a break cost up to 5 years into the loan).
- Is there a cap on additional repayments I can make?
- Do I have redraw facilities during the honeymoon period?
How do I compare mortgages?
RateCity is the best website to shop around on for over 2000 home loans and most other financial products. At RateCity, you can use expert comparative data from CANSTAR CANNEX, Australia's leading financial research and ratings firm. CANSTAR CANNEX has analysed and evaluated hundreds of products to award five stars to only the very best. The CANSTAR CANNEX star ratings go much further than just looking at interest rates. They also take into account important features such as redraw facilities, offset accounts, ongoing fees, early repayment penalties and many other features so you can be confident you are getting the best product.
| Company | Product | Rate | Intro Period | Rate reverts to (name) | Rate reverts to (rate) | AAPR for $250K over 25 years | Fixed or Variable rate | Apply |
|---|---|---|---|---|---|---|---|---|
| Meridian Money | KickStart 6mth Intro | 6.29% | 6 Months | AAA | 7.59% | 7.55% | Variable |  |
| Wagga Mutual Credit Un | $500 Cash Back Home Loan | 6.50% | 6 Months | Standard Variable | 8.20% | 8.11% | Fixed | |
| Coastline Credit Union | Intro Rate Option | 6.54% | 6 Months | Options Home Loan | 8.29% | 8.27% | Variable | |
| La Trobe Financial Servs | 6mth Intro Var Home Loan | 6.59% | 6 Months | Standard Var Home Loan | 8.64% | 8.63% | Variable | |
| Qld Professional CU | 1yr Friendly Home Loan | 6.70% | 12 Months | Friendly Home Loan | 7.80% | 7.77% | Fixed | |
| University Credit Soc | 1 Year Special Variable | 6.75% | 12 Months | Standard Variable | 7.85% | 7.76% | Variable | |
| Hunter United Credit Un | Excel A Rate Intro Fixed | 6.95% | 6 Months | Excel A Rate Basic Var | 7.85% | 7.86% | Fixed | |
| Source:www.canstarcannex.com.au (22/11/2007) | ||||||||
| Ranked by advertised interest rate | ||||||||
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