We all want the best home loan interest rate, and often we chase ‘introductory’ or ‘honeymoon’ interest rates to secure a cheap home loan. But what happens after the introductory rate expires?
What is an introductory rate?
Essentially, it’s a discount that is applied to the interest rate for a period of time. Usually applied to a variable interest rate, the discount is applied to the rate throughout the promotion period.
For example, a current introductory offering is a 1% discount on a lender’s standard variable rate. The standard variable rate is 4.59% and the 1% discount brings the rate down to 3.59%.
The introductory discount is offered for a period of time, in this case, it’s 2 years. After the 2 years, the discount is removed, and the interest rate will revert back to the standard variable rate.
Will my interest rate change during the introductory period?
Yes. If the interest rate is variable, then the interest rate and your repayments will fluctuate when the lender changes their standard variable interest rate. However, the discount will continue to apply to that rate during the introductory period.
How is this different to a discounted fixed interest rate?
A discounted fixed interest rate will stay the same throughout the fixed period. For example, if you fix your home loan interest rate at a discounted rate of say 3.69% for 2 years, the rate and your repayments will remain exactly the same throughout those two years.
Why do they call it a ‘honeymoon’ interest rate?
Ah, well, we all know the honeymoon period in marriage is a wonderful time, the sun shines, the birds tweet and you’re in love! An introductory rate evokes similar feelings to a honeymoon. A great low interest rate, a generous discount and often the lender will waive some establishment fees – must be love. But when the honeymoon period is over or rather the discounted interest rate period, the interest rate shoots back up to the standard variable rates. Fun over.
Pros and cons of an introductory interest rate
- You receive a discounted interest rate, which often can be the cheapest in the market at that time.
- The discounted period is usually around 12 months, but some offer the discount for up to three or four years
- Often the lender will waive fees as part of the promotion
- Popular with First Home Buyers as the low interest rate can help you get ahead financially during the discounted period
- Once the discounted period ends, the standard variable rate will apply and is often much higher
- Good discounts are often only offered to owner occupiers on principal and interest repayments
- Some lenders may cap or limit the amount of extra money you can pay off the loan during the introductory period
- Check the loan has the features you want, eg offset or redraw facility
- Check exit, break costs or period of restriction/penalties with the loan as you may want to refinance once the introductory discount expires
- Your interest rate and repayments can still go up (or down)
Expert guidance and real-time comparison
When you’re looking for a great interest rate, there are so many other factors to consider. Working with experienced mortgage broker, Mint Equity, will provide you with over 20 years banking and finance experience to help you find the right home loan. We’ll provide you with a full product comparison, tailored to your current needs and future strategy.