Honeymoon home loans initially offer a low interest rate then revert to a higher one. Find out how they can benefit you and compare a range of home loan offers with Savvy.
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A honeymoon home loan offers you a special low interest rate at the beginning of your loan, before reverting to a standard higher rate once the fixed period is over. They can be a lifesaver if you’re just at the start of your home-owning journey and need that extra cash to buy furniture and set up your home.
However, as much as a honeymoon loan can be a great help at a difficult time in your life, you should be aware of its potential pitfalls. Savvy can help you decide which loan is right for you by presenting up-to-date loan comparison information to help you decide the best loan for your personal circumstances.
A honeymoon loan is one where an initial low interest rate (also known as an ‘introductory rate’) is offered to attract borrowers, but after a fixed period reverts to a higher rate. The fixed term is usually between six months and three years, after which the loan can either revert to a higher fixed rate for a set term or to a variable rate for the remainder of the loan.
Sometimes such loans are offered on a ‘fixed discount’ basis, which means the interest rate you pay is variable but is based on the lender’s Standard Variable Rate (SVR) minus a set fixed discount (for example, SVR -1%). This means if the lender’s SVR is 3.5% p.a., your honeymoon rate would be 2.5% for the introductory period, after which it will revert to the standard rate of 3.5% p.a. (or whatever the standard interest rate may be when your loan reverts).
This chart shows how a low introductory interest rate for the first two years will mean reduced repayments in the initial period, before reverting to a higher variable rate for the remainder of the loan. The introductory interest rate will save on the interest you pay overall.
This example uses a mortgage of $360,000 taken out over 30 years with monthly loan repayments made:
| Loan Period | Interest rate | Repayments per month |
|---|---|---|
|
Year 1 |
Honeymoon
1.89% p.a.
|
$1,311 |
|
Year 2 |
Honeymoon
1.89% p.a. |
$1,311 |
|
Year 3
onwards
|
Revert rate, variable
3.5% p.a.
|
$1,597 |
Note that in the above example, the total interest payable over the life of the loan would be $208,161. If the loan had been taken out at the variable rate with no honeymoon reduced rate, $221,962 interest would have been paid. This shows that even if you chose not to refinance your home loan to one with a better rate after your introductory period, the honeymoon rate would save you $13,801 in interest.
Smart borrowers should be able to take advantage of the low introductory interest rate and refinance to a lower fixed or variable interest rate when it’s over. Note that such honeymoon loan rates can apply to both principal and interest loans and interest-only loans.
Another way to boost your savings is to budget and plan to make repayments at the full revert rate (in our example above that’s 3.5% p.a.). Instead of paying the lower repayments, you can pay the full revert rate repayments right from the start, paying the extra amount directly off your loan principal or into an offset account. This way you won’t suffer repayment shock when your rate increases and you’ll substantially pay down your loan principal during this term. Using the above example, you’d pay almost $7,000 more of your principal in the two-year introductory term by paying at the revert rate from the outset.
Home loans with honeymoon rates are primarily aimed at younger first homebuyers at the beginning of their careers who are not able to afford large loan repayments as they set up their home. However, they’re available to anyone, and can also be attractive to property investors who are looking for lower mortgage repayments whilst they find tenants or carry out repairs. As such, you may find yourself in a position to take advantage of an introductory rate even if you’re not a first homebuyer.
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Low initial repayments during the home establishment phase can help cash-strapped first home owners
Lower initial repayments can help ease you into a regular home loan repayment routine
Save interest in the honeymoon phase of the home loan (with a very low interest rate for a fixed period)
A honeymoon loan can assist property investors who wish to renovate before finding tenants (so they can experience low repayments at a time when they have no rental income and expensive renovation costs)
Lower initial monthly repayments can be used to build up home equity more quickly (if you’re able to afford higher loan repayments and put the difference into an offset account or pay it directly off the principal you owe)
The revert standard variable interest rate can be higher than a standard fixed home loan
Refinancing your home loan to a cheaper rate could subject you to extra break fees, which are often calculated on the principal of the loan and fixed time remaining
Some honeymoon loans cap the additional repayments you’re permitted to make, restricting your ability to pay off your loan more quickly to save on interest
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
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© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
