Mortgage lenders were doing a stack of advertising pre-Christmas for loans with low introductory interest rates. But now the turkey’s settled and the credit card statements are piling up, it’s a good time to look at whether these loans will actually suit your circumstances.
Sometimes known as honeymoon loans, the ones we’re talking about either have a low initial fixed rate or promise a floating rate below their usual floating rate for a set period (such as a year).
They can be a great deal at a time when you can benefit from the extra savings. However, it pays to look beyond the sweetener and consider your ongoing relationship with that particular mortgage lender, as chances are you'll have your loan for a few years at least.
A lot of honeymoon, or low-start loans, are pitched at first-home buyers who may be struggling to cope with their debt. Paying less interest to start with can be a big drawcard as they often need to buy furniture and have extra set-up costs.
However, they may also be less likely to consider the true cost of the loan and whether any conditions may suit them. As the introductory period is comparatively short, the rate that the loan reverts to will also have far more impact on their total borrowing costs.
Lindsay Hore, Forsyth Barr's National Manager Mortgage Services, says that borrowers should always look at the total deal, not just the interest rates. "A cheaper rate can be more than offset by fees, compulsory insurance and so on."
"For example, you might get a 0.1 per cent cheaper rate at a non-bank, which on a $100,000 mortgage translates to $100 a year in interest costs. However, you might miss out on fee rebates on your banking transactions."
Martin Shepherd of Auckland-based Shepherd Financial Services, which specialises in mortgage and insurance planning, says that borrowers should carefully weigh up the benefits of any loan. He also notes that low initial payments could end up locking people into the loan for a longer period than they require if there are associated break costs.
"As an adviser, I’m ensuring that loans are structured in such a way as to offer flexibility. The usual things – if people are concerned about interest rates, they would be best to lock in at least a portion of their funding under eight per cent and leave themselves with a flexible home loan account which would allow them some savings on their banking and transaction costs."
So, before you embark on your honeymoon or on any loan, it might pay to check out:
- The actual finance rate of the loan. The lender should be able to tell you this: it takes account of the interest rates involved as well as fees associated with the loan.
- How the loan is structured. Is it fixed, discounted (below the normal variable rate) or capped (won't rise above a preset level)? After the honeymoon, will it revert to a fixed or floating rate loan?
- What extra conditions are involved with taking out the loan? Are there penalties for repaying the loan early, and within what time period?
