Introductory loans, referred to as “honeymoon loans” are so tempting. They ooze low interest rates, caress you with saving after saving, but in the long run, these loans can end up costing you more. If you don’t play your cards right, it could be a marriage made in hell!
Don’t be discouraged however. There are certainly some major benefits to these loans. The discounted rates apply for a defined period of time, usually six months to one year. In the beginning of your home loan, your repayments will be low because the interest rate is low. So for borrowers on a budget who want lower repayments at the start, such as first home buyers, this type of loan fits the bill. Everybody likes low interest rates, and as a homeowner, you can be using the money saved for other things.
Remember though, a cheap mortgage does not always a mean better deal for you. Be aware that once the introductory period ends, the rate will revert to a higher rate, and this is sometimes higher than the standard home loan. There are usually not many extra features so there may be fees and charges associated for early repayments, therefore any borrowers planning on taking out this type of loan need to consider carefully whether the restrictions placed on the loan, are worth the very low interest rates. It may end up costing you more long term.
Many home loan lenders will have large penalty fees for borrowers deciding to refinance at the completion of the honeymoon period. So, you can see it is vital that you assess any honeymoon loan for exit penalties before you go ahead and sign the dotted line.
Choose the right path
However, that said, introductory loans can still prove very useful to some borrowers, and as with any financial decision, the pros and cons are weighted up against each other. These loans best suit first-home buyers who may want time to adjust to the repayments, as well as people refinancing who require a financial boost.
Honeymoon rates are often very good deals, but at the end of the day, you should bear in mind that cheaper interest rates don’t necessarily equate to a better home loan. While a cheap rate may look attractive, a slightly higher interest rate may allow you to get a range of additional features like redraw and internet banking.
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