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Honeymoon rate conjures up images of a holiday in a tropical location with an endless expanse of pristine beaches but what happens when the honeymoon ends and reality sets in?

Honeymoon rate conjures up images of a holiday in a tropical location with an endless expanse of pristine beaches but what happens when the honeymoon ends and reality sets in?

Could a home loan that starts off promising a super low interest rate actually turn sour once the honey moon is over? So what is a honeymoon rate?

You may have seen lenders advertising an interest rate which is much lower than their other home loan products. This is often advertised as an introductory or honeymoon rate and is offered for an agreed initial period of the home loan term. Lenders advertise this offer in order to attract new borrowers.

The issue is that this low rate only lasts for a period of time, after which it reverts to a higher interest rate which may mean that your interest rate is well above what other mortgage holders are paying. If you have borrowed more than 80% of the purchase price, then mortgage insurance may prevent you from refinancing to a better rate elsewhere and your current lender may charge a fee to switch into a more competitive rate.

In some instances, a honeymoon rate home loan can be beneficial. For example, many first home buyers find that the lower interest rates allow them to ease into the mortgage repayments and have time to get used to how a mortgage operates. The low interest rate may equate to thousands of dollars in interest saved at a time when the mortgage is at its highest balance. Some borrowers may use this as an opportunity to make repayments during the initial period so not only are they prepared for higher repayments when the interest rates change back, but they would have also paid extra off their home loan.

Although these rates may seem very attractive and there are some benefits, there are certain restrictions you should be aware of.  Firstly, you may spend less on repayments when the interest rates are low during the honeymoon period, but when this period ends, you may end up with a rate that is not as competitive in the market and in turn repayments will increase. Secondly, some lenders may have high early termination fees, so if you do find a better deal, it may be extremely costly to terminate the loan. Lenders mortgage insurance may also lock you in with the lender.

So, how can you protect yourself and avoid getting caught up in paying more? Simply by doing your research.  Before applying for a home loan with a honeymoon rate, you should find out what the interest rate will be when this period ends. The last thing you want is to go back to an interest rate that is higher than other lenders in the market. Compare what you will pay in interest on a few loans say over the first five years and see how they stack up. Potentially you may be better looking at lenders outside the major banks and start with a low variable rate that is not for a limited time.

Also, it may be worth researching what home loan features are available. You may find that the features are limited as you have a lower interest rate.  The amount of features available could limit the amount of flexibility you have with the loan. Being able to pay extra and redraw for free is some of the best ways of getting ahead and saving on interest.

Overall, a lower introductory interest rate may save you money in the short term, but you will also need to be prepared for what happens when the honeymoon is over.