Honeymoon loans promise a lot but often leave home owners wondering if it was all worth while. We examine the pros and cons and show you how to choose the loan that’s right for you.

Intense competition in the home loan market has led to home loans being at rock-bottom rates. Many are dubbed ‘Honeymoon’ or introductory home loans, designed to appeal to first home buyers.

Honeymoon loans have one big advantage over other loans: very cheap initial interest rates. These honeymoon loans can be either fixed or variable, depending on the financial institution. The low ‘honeymoon’ rate lasts for a set period of time – generally three to 13 months – after which it reverts to a higher variable rate.

But are they all they’re trumpeted to be? The key to knowing if the honeymoon will end in true love or tears is understanding the loan terms, conditions and true cost.

Help when you need it most

Honeymoon loans typically offer fixed repayments and interest for the first year while you get started. In this way, they offer the greatest possible certainty in the first year of a home buyer’s loan – the very time when your up front costs such as stamp duty, legal and moving fees are highest.

Some honeymoon loans feature a variable interest rate. In this case, the rate is set well below the lender’s other standard loans. For example, the interest rate on a honeymoon loan could be 5.5% p.a., while the lender’s standard variable rate loan is set at 6.5% p.a. If rates rise during the introductory period, the honeymoon rate would rise by the same amount as the lender’s other variable rate loans.

Devil is in the detail

Prior to the introduction of comparison rates (previously known as the Annualised Average Percentage Rate or AAPR for short), many consumers were confused about honeymoon loans.

The proliferation of lenders and loans in the market made it very difficult for consumers, even when they do read the fine print, to compare apples with apples. The low interest rate of honeymoon loans, in particular, tended to obscure other important features such as additional fees and the rise in the interest rate at the end of the introductory period.

Comparison Rate can help

The Comparison Rate incorporates the loan’s start-up rate plus all the fees and charges to come up with a single figure. All lenders must provide a schedule with details of Comparison Rates for fixed term loans, allowing consumers to compare the interest rates and fee structures of different loans.

The Comparison Rate is particularly effective in the case of honeymoon loans as it incorporates both the initial low rate and the higher rate the loan defaults to at the end of the introductory period.

Honeymoon falters on rising rates

When honeymoon rates were introduced a few years ago, interest rates were falling. This was an added bonus for home buyers as they often reverted to an even lower rate at the end of the introductory period.

But with home loan interest rates tipped to start rising soon, borrowers could soon find themselves facing the opposite scenario. Having enjoyed a period of low rates and low repayments, borrowers face a sudden large and difficult jump in rates (and possibly repayments) as the honeymoon ends.

Beauty is more than skin deep

Like any good marriage, it’s what lies behind the packaging that counts. To determine the best loan, you need look at more than rates and fees. Consider:

• Does the loan have the features I need?
• Will the loan still suit me in five, seven or even 10 years?
• Can the lender give me the service I need?