Introductory Rate Home Loans

Discounted interest rate for 1 to 3 years, then what?

Introductory rate (honey-moon home loans) offer a discount on interest rate in the first 1 to 3 years and later revert to a higher variable rate.

These loans are often used as sweeteners for lenders to attract business; however, the devil is in the detail. The savings made in the first year is often regained by a combination of higher interest rate after the introductory term, high get in and get out fees, high switching fees or exit costs.

What to look for

• A low initial interest rate which later reverts to a significantly higher interest rate after the introductory term has ended

• Very high entry, exit fees or change of product fees

• Restrictions on refinancing or switching products without severe penalties

• Restriction with extra repayments and other features such as offset and redraw

Advantages

• Low initial interest rate to make extra repayments to pay down the loan quicker

• Lender allows to change product with out excessive fees.

• Ongoing interest rate is competitive to most basic and professional packaged loans.

Disadvantages

• Refinancing or changing loans can be expensive.

• Paying a higher interest at the end of the introductory period.

• Can be restrictions on extra repayments.