In an introductory rate home loan, the interest rate is lower for a period at the beginning of the loan (the “honeymoon” period), and then goes up. The honeymoon period is typically one year, but the specifics (duration, rates, fixed or variable) vary by lender. This type of loan may be a good idea for home buyers looking to get a jump start on payoffs by making higher payments or extra payments during the introductory period, but some lenders do enforce restrictions on this.

 

More About Introductory or Honeymoon Rate Home Loans

An introductory rate home loan typically has a distinct interest rate structure that features two separate interest rates. During a set period of time at the beginning of the loan (“the honeymoon period”), the interest rate is lower. This period of time is usually 12 months, but it varies from lender to lender. After this period, the rate goes up. During the honeymoon term, the interest rate could actually be as much as one percent below normal home loan rates, making this an attractive option to borrowers who anticipate overpaying for the first year to pay off a good sized piece of the loan. Depending on the lender and the terms negotiated, an introductory rate home loan may have a fixed or variable rate.

 

Advantages of Introductory Rate Home Loans

The major advantage of this type of loan is the low introductory rate. For the first year, the honeymoon rate loan is likely to have the lowers interest rate of any loan on the market. A motivated borrower who has the intention of working hard and paying more than the minimum or making more than one monthly payment can take advantage of this lower rate period to take a good amount off the principal of the loan. There is a possible drawback to this, though.

 

Disadvantages of Introductory Rate Home Loans

While introductory rate home loans give eager borrowers the opportunity to pay off a good chunk of their loan quickly due to the introductory lower interest rate, the home buyer needs to be sure they’re not over aggressive. This is because most borrowers issuing introductory/honeymoon rate home loans will charge the borrower with a penalty if the full amount of the loan is paid too quickly. Typically, lenders will fine the borrower if the introductory rate loan is completely paid within three to four years of settlement. It is important to check with individual banks to determine their policies in this important matter. For a closer look at introductory rate home loans or to get more information about all loan types available to you, please fill out the contact form below.

 

Another drawback to introductory rate home loans is seen in the features available. A cheaper loan often means fewer features. While borrowers can pay extra to an extent, the ability to reclaim those overpayments if necessary (“redraw”) is typically not a standard feature with introductory rate home loans. Likewise, there may be large fees to convert to a different loan type if the borrower decides there is a better option out there after the honeymoon period. If you think these options may be worthwhile, it may be best to reconsider introductory rate home loans.