Avoid honeymoon rates: RateCity

According to new research by RateCity, introductory rate home loans are causing long-term financial strain for a very short-term reprieve.

RateCity’s chief executive officer Damian Smith said while a discounted interest rate might be tempting when entering the property market for the first time, once the honeymoon is over the interest rate always reverts to a much higher rate than what you could find from another home loan.

Mr Smith said first home buyers are the most vulnerable to sudden increases in interest rates at the end of a honeymoon period.

“The real concern is that first home buyers will be under the most financial strain if they choose an introductory home loan, than any other borrower. That’s because they are new to the property market and they are more vulnerable to interest rate rises because they are more likely to be younger and earning less so their proportion of income to repayments is higher,” he said.

“Once the honeymoon period ends and you have to pay hundreds of dollars more each month, the extra costs for one year of reprieve probably won’t be worth it.”

RateCity found that introductory rate home loans on average cost borrowers over $16,000 more than ordinary variable home loans (comparing variable intro rate loans with a 12-month honeymoon period for a $300,000 loan size).

“Introductory rate home loans only suit those that are planning to pay off their mortgage during the honeymoon period or shortly after and borrowers who plan to switch to a better deal directly following the honeymoon period,” Mr Smith said.

“If you can’t afford an extra $45 per month in the first year of buying a home, you should be very wary about taking on a home loan. You may need to reconsider your budget and find what you realistically can afford.”