What are Honeymoon Loans?

Generally, you have two kinds of mortgage loans in Australia that you could choose from. First, there is the fixed rate home loan and the other one is the variable rate mortgage loan. However, if you would dig a little deeper, you will discover that there are other special types of home loans. These specialised packages are meant for special circumstances. One of these many specialised packages is the honeymoon loan.

Honeymoon loans are loans that are available to first time home buyers. This is probably the type of loan that you will likely come across a lot. These loans have their honeymoon period within which you will be allowed to pay a discounted fixed interest rate or fixed discount. The fixed discount is variable. It is always below the standard variable rate that moves with the market trend. On the other hand, the discounted fix rate is fixed. It is to be applied during the entire introductory period, and it won’t move with the changes in the market.

During this honeymoon period – usually 6 months to four years – you will enjoy very cheap interest rates. Once the period lapsed, your interest rate will revert back to the prevailing market rate. These types of loans are cleverly designed in order to entice first time home buyers to avail of the loan. This is not available to borrowers with existing loans. Although this type of loan may be packaged quite nicely, you need to remember that once the introductory period lapsed, you will be charged with the prevailing variable rate. You could end up with a really expensive market rate, and lose all the money you saved during the introductory period.

Another disadvantage of this type of loan is that your lender may limit the amount of extra money you can pay off during the initial period. You wouldn’t be able to fully enjoy all the benefits of discounted interest rates during this period. Lenders won’t usually allow you to get out of loan before the end of the introductory period. Usually, you would pay a significant amount in order to do this. There are lenders who charge a certain percentage of the principal if you exited the loan prior to the expiration or within the introductory period.

In order to avoid this, you should consider looking for a loan that lasts for as long as you planned your payment term to last. Check out various loans and see if they offer an introductory period. Then choose the offer that is more favourable to you. This is one good conservative strategy that you can adopt in order to take advantage of an introductory offer without getting caught in the honeymoon loan trap.

The key is to do your research. Find a cheap loan with great terms before you make your decision.