Variable rate and the fixed rate home loans are the most popular home loan rates for Australian homeowners. However, if you’re a first home buyer or are looking to save some money in the short term, there are increasingly flexible options such as ‘honeymoon’ and ‘rate tracker’ loans that might be worth exploring.
Honeymoon or ‘introductory’ rates are normally targeted at first home buyers, and use the carrot of an attractive low rate for the first six or 12 months. The catch is that when the honeymoon period is over, the home loan rate reverts to a standard variable rate, which is generally higher. Moreover, this rate is often higher than the rates charged by the competition.
While honeymoon rates may seem enticing, the loan term is often too short to generate decent savings – unless you can throw some additional payments at the balance early. Also if you miss a payment, don’t be surprised to see the rate climb steeply.
For this reason the best strategy when looking for the right home loan rates is to concentrate on the ‘comparison rate’ (more on this below). In other words, consider the overall value of the loan and avoid the tempting introductory specials.
Rate tracker loans
Another interesting innovation is the rate tracker loan, which moves in step with the Reserve Bank of Australia’s official cash rate. In other words, if the RBA shifts interest rates up or down, by say 0.25 percent, the interest rate attached to a rate tracker loan also moves by 25 basis points in this instance. In other words, lenders cannot make additional interest rate changes. If you want this peace of mind, then rate tracker loans might be for you.
By law, whether you have a standard variable, fixed, honeymoon or rate tracker loan, lenders are required to advertise the comparison rate (or ‘average annual percentage rate’). The comparison rate includes all additional fees and charges such as any upfront or monthly on-going costs.
When making your decision it’s best to shop around, do your research and compare the different home loans until you find one that suits you and your financial circumstances. The RateCity home loan comparison page and repayment calculator would be a great place to kick off your search.