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Is the honeymoon over for introductory rate loans?

Is the honeymoon over for introductory rate loans?

March 25, 2011

Home owners are wising up to some deceptively pricey introductory rate home loans, with application rates at record low levels last month for the mortgages RateCity monitors. Despite offering some of the best initial interest rates in the market, introductory mortgages accounted for only 2 percent of all home loan applications on the site in February, compared with the 2010 average of 9 percent.

Introductory versus regular mortgages
Unlike standard or basic home loans, an introductory rate home loan is one that carries a discounted rate for a set term, known as a “honeymoon period”, to lure in new customers. Special honeymoon rates generally extend from three and six months, up to three years.

The rate later reverts to a higher variable rate, which can often be more expensive than the market average for standard variable rates, in turn costing borrowers more in the long run than a good value rate from the start of the loan term.

For example, Mortgage House‘s Carpe Diem Home Loan, which offers a honeymoon rate of 2.98 percent, reverts to 7.7 percent after six months for a $300,000 home loan over the course of 25 years. By comparison, one of the top variable rates listed on RateCity is

Collins Home Loans Variable at 6.72 percent.

By choosing the Collins Home Loan over the Mortgage House honeymoon option you could potentially save more than $51,600 over the life of the loan, minus fees.

It’s common for introductory rates to carry a number of heavy conditions too. For instance, if you fall behind on a payment you may be hit with a fee for up to $195, effectively removing all of the benefits of a cheaper rate.

Why the slow down?
With comparisons and statistics such as these, it’s little wonder that many home owners are bypassing introductory rates in favour of regular loans. But the drop in applications for introductory rate home loans may be attributed to a simultaneous slowdown in the number of first home buyers too.

The reason for this is that the number of first home buyers, which predominantly take out introductory rate mortgages, has gradually fallen away in recent months.

The drop was only marginal between December 2010 and January 2011, down 0.6 percent to 15.2 percent of all new mortgages, according to Australian Bureau of Statistics (ABS) data. However, that number is significantly less than two years ago, when first home buyers made up 28.5 percent of the market, at the height of the Commonwealth’s First Home Owner Boost.

Despite the reason for the slip in applications, it’s clear that Australians are falling out of love with the often expensive honeymoon period loans. Instead, home owners are thinking less impulsively and more about long-term financial gain.

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