Let’s understand one thing, even onnormal home loans lenders don’t make much if anything out of your home loan in the first year or two. These loans are intended to attract you in the hope that you will stay with the lender and there are some very good deals available and they can be particularly attractive to borrowers with large loans on single properties as a saving of even 0.25% can be substantial. For first time borrowers looking for loans around $300,000 a 0.25% rate reduction can save you $750 in the first year – the question is how much will you be saving if you stay for 2 or 3 years.
Introductory rate or honeymoon loans are loans that offer a ‘special’ low rate for an introductory period and then the rate escalates to a higher ongoing rate. Before the government’s ban on early exit fees these loans were a real trap, giving an attractive rate for 6 or 12 months then locking you in on a uncompetitive rate for 3 to 5 years with big penalties if you tried to get out early.
In the new regulated market hangovers have improved however the competitiveness of the introductory offer is probably not as keen.
Things to be aware of:
- you may not be allowed to make additional or lump sum payments
- you may not have access to offset account or redraw during the introductory period
- any special or package discounts may not be fully honoured at the end of the honeymoon
- you may have to pay additional fees to switch to a better product after honeymoon is over.
In years past in my role as a mortgage broker I used to get regular calls from what I called ‘honeymoon junkies’ people who just went from one honeymoon to the next. However there just aren’t that many good ones and the lenders quickly realise what they are dealing with and start looking for reasons to reject the applications.
In todays finance world of automated credit scoring you need to be careful about going in for a short term. The magic number is around 6 credit inquiries over the last 2 years and these include credit cards, car loans, mortgage insurance and home loans. One home loan application with mortgage insurance will probably generate 2 inquiries however if there is any re-work done on the loan eg: valuation is short so higher LVR required – this can result in another round of credit inquiries. So if you hope to refinance in 12 months time to a better deal you better not apply for any store cards etc.