Introductory rate home loans

While comparing home loans you may come across the term ‘introductory rate’. But what is an introductory rate home loan and how can it impact your mortgage repayments?

An introductory rate, or ‘honeymoon rate’ is an interest rate that a lender offers new customers. As the name suggests, an introductory rate lasts only a short period – typically 12 months - and then reverts to a higher ongoing variable rate.

How much can you save with an introductory rate?

The deal that you may be offered on an introductory rate home loan differs for every lender and borrower, depending on your home loan goals and financial situation.

Generally speaking, the appeal of an introductory rate is that it is a big discount for eligible borrowers compared to the lender’s standard variable home loan rate. This can amount to several hundred dollars saved in interest charges over the first year of the home loan.

For example, a first home buyer wanted to borrow $500,000 over 25-years and were interested in a home loan with an introductory rate of 2.8% that reverted to a standard variable rate of 3.8%.

Hypothetical 25-year, $500k home loan with intro rate

Source: RateCity.com.au. Note: Based on hypothetical 25-year, $500,000 home loan with introductory rate of 2.8% that reverts to 3.8% after 12 months. Does not factor in fees or rate fluctuations.

The benefits of an introductory rate home loan

Lenders offer introductory rates for a few reasons, including to entice new customers to join with them as a competitive offer and to help new borrowers get on top of their home loan repayments at the beginning of the mortgage.

After a first home buyer pays their upfront costs like the deposit, stamp duty or Lender’s Mortgage Insurance (LMI), it’s not uncommon for savings to be low and the household budget to be tight. By paying a lower introductory rate, borrowers may have a chance to get back on top of their finances.

Further, by reducing home loan expenses in the first year, some first home buyers may be able to put these savings towards upgrades to the new home, such as furniture and appliances.

The risks of an introductory rate home loan

The most important thing to know about an introductory rate is that it will revert to a different interest rate once the honeymoon period ends.

This rate is almost always much higher, meaning your home loan repayments will be higher in your second year of having the mortgage. If you have not budgeted and planned for this revert date you may find yourself financially stressed when your rate rises along with your home loan repayments.

Further, as interest charges are one of the most significant costs for a home loan, you may want to do your research and use a Mortgage Repayment Calculator to make sure you aren’t better off just opting for a lower-rate home loan to begin with.

Calculate what a lender’s introductory rate and its standard variable rate would mean for your repayments, and then compare this to another loan option. You may find that over a longer period, like five years, you’d save more in interest by opting for a lower-rate variable loan to begin with than by opting for a rock-bottom introductory rate that reverts to a much higher rate after 12 months.

Also, keep in mind there is more to a home loan than the interest rate offered. You need to ensure that the home loan you choose suits all your goals outside of being more affordable in the first 12 months.

That means comparing any fees charged as well as features offered, such as an offset account. Introductory rates can be fixed rate home loans, which generally do not offer as much flexibility like features or making extra repayments.

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