Beware of Honeymoon Rates: What Happens When They End?
Honeymoon rates on home loans can seem like an enticing offer for first-time homebuyers or those looking to refinance. These introductory rates, typically lower than standard variable rates, are designed to attract borrowers with the promise of reduced repayments in the initial stages of the loan. However, it’s crucial to understand what happens when these honeymoon periods come to an end. This article explores the potential pitfalls of honeymoon rates and provides guidance on how to navigate the transition when they expire.
What Are Honeymoon Rates?
Honeymoon rates, also known as introductory or discounted rates, are special interest rates offered by lenders for a fixed period at the beginning of a home loan. These rates are usually significantly lower than the standard variable rate and typically last for 6 to 24 months.
According to Savvy, a honeymoon home loan offers a special low interest rate at the beginning of your loan before reverting to a standard higher rate once the introductory period ends. This initial period is designed to ease borrowers into their mortgage repayments and can be particularly appealing to first home buyers who may be facing additional costs associated with setting up their new home.
The Appeal of Honeymoon Rates
The primary attraction of honeymoon rates is the potential for significant savings during the introductory period. For example, a 1-2% discount on your interest rate could translate to hundreds of dollars in savings each month on your repayments. This can be particularly beneficial for borrowers who are:
- First-time homebuyers adjusting to new financial responsibilities
- Looking to make additional repayments early in the loan term
- Expecting an increase in income in the near future
- Planning to sell or refinance before the honeymoon period ends
The Risks of Honeymoon Rates
While the initial savings can be substantial, honeymoon rates come with several risks that borrowers need to consider:
1. Rate Shock
The most significant risk associated with honeymoon rates is the potential for ‘rate shock’ when the introductory period ends. The revert rate – the interest rate that applies after the honeymoon period – is often higher than the standard variable rate offered to new customers.
For instance, if your honeymoon rate was 3.5% and it reverts to a standard variable rate of 5.5%, you could see a substantial increase in your monthly repayments. This jump can be challenging to manage if you haven’t prepared for it financially.
2. Higher Long-Term Costs
While you may save money during the honeymoon period, the higher revert rate could mean you end up paying more over the life of the loan compared to a loan with a consistently competitive rate.
3. Limited Flexibility
Some honeymoon rate loans come with restrictions on making extra repayments or may not offer features like offset accounts or redraw facilities. This can limit your ability to pay down your loan faster or access your funds if needed.
4. Exit Fees
If you decide to refinance or sell your property before the loan term ends, you may face exit fees or break costs, particularly if you’re still within the honeymoon period.
What Happens When Honeymoon Rates End?
When the honeymoon period comes to an end, several things can occur:
- Rate Increase: Your interest rate will increase to the lender’s revert rate, which is typically higher than the standard variable rate offered to new customers.
- Higher Repayments: As a result of the rate increase, your monthly repayments will go up. This can be a significant jump if you’re not prepared for it.
- Reassessment of Loan Features: Some features that were restricted during the honeymoon period may become available, such as the ability to make extra repayments without penalties.
- Opportunity to Renegotiate: The end of the honeymoon period can be an opportunity to renegotiate your loan terms with your current lender or consider refinancing with a different lender.
How to Prepare for the End of Your Honeymoon Rate
To avoid financial stress when your honeymoon rate expires, consider the following strategies:
1. Budget for Higher Repayments
From the outset, budget for the higher repayments you’ll face when the honeymoon period ends. This can help you avoid financial shock and ensure you can comfortably manage the increased costs.
2. Make Extra Repayments
If your loan allows, make extra repayments during the honeymoon period. This can help reduce your loan principal and potentially offset some of the impact of the rate increase.
3. Research Your Options
Before your honeymoon period ends, research the market to see what other loan options are available. You may find that refinancing to a new loan with a competitive ongoing rate could save you money in the long run.
4. Negotiate with Your Lender
Don’t be afraid to contact your lender and ask for a better deal. Speak with confidence and ask for the same rate offered to new customers. You may find lenders are willing to negotiate to keep your business.
5. Consider Fixing Your Rate
If you’re concerned about interest rate volatility, you might consider fixing your rate for a period after the honeymoon ends. This can provide certainty around your repayments for a set time.
While honeymoon rates can offer attractive short-term savings, it’s crucial to look beyond the introductory period and consider the long-term implications for your finances. By understanding what happens when honeymoon rates end and preparing accordingly, you can make informed decisions about your home loan that align with your long-term financial goals.
Remember, the right loan for you isn’t necessarily the one with the lowest introductory rate, but rather the one that offers the best overall value and aligns with your financial situation and goals. Always consider seeking advice from a financial professional before making significant decisions about your home loan.
By being proactive and informed, you can navigate the end of your honeymoon rate with confidence and ensure that your home loan continues to work for you long after the honeymoon is over.