Honeymoon Rate Home Loans

Honeymoon home loans initially offer a low interest rate then revert to a higher one. Find out how they can benefit you with comparison expert Savvy.

Last updated on April 27th, 2022 at 10:46 am by Cate Cook

Honeymoon or introductory rate home loans explained

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.

How do honeymoon rate home loans work?

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).

How will initial lower interest rates affect my repayments?

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.  

How can I use a honeymoon loan to get ahead?

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.

Who are honeymoon loans usually aimed at?

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.

The pros and cons of taking out a honeymoon rate home loan

PROS

Lower payments

Low initial repayments during the home establishment phase can help cash-strapped first home owners

Get accustomed to your mortgage

Lower initial repayments can help ease you into a regular home loan repayment routine

Interest savings

Save interest in the honeymoon phase of the home loan (with a very low interest rate for a fixed period)

Help when there’s no rent

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)

Help build up equity

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)

CONS

Revert rates can be high

The revert standard variable interest rate can be higher than a standard fixed home loan

Additional exit fees

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

Capped repayments

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

Your frequently asked questions about honeymoon rate loans

Do all lenders offer honeymoon rate home loans?

Not all lenders offer this type of loan, but Savvy can help you find many that do.  By listing offers from our diverse and reputable lending partners, you can compare both introductory and non-introductory rate offers all in one place to help you determine which is best for you.

Are there any restrictions on the type of property I can buy with a honeymoon loan?

No – the type of property you wish to purchase will have no bearing on your application for a honeymoon or introductory home loan.

Could I extend my honeymoon rate period?

Possibly – but that will depend on which lender you choose, as loan terms and conditions vary greatly between the different lenders.  It may also depend on the length of your initial honeymoon rate period, as you have

What is a ‘switch fee’ when applied to a honeymoon loan?

A switch fee is sometimes charged when you refinance your loan to another mortgage with the same lender.  For example, if you wanted to change the type of loan you have when your fixed interest rate period is over, you would have to pay a fee to do so with your current lender in some circumstances.

What’s the difference between a ‘switch fee’ and an ‘early exit fee?’

Switch fees are an alternative to early exit or break fees, which a lender may charge if you swap to another lender entirely when you refinance.  Break fees are calculated based on the size of your loan and how much of the fixed rate period is remaining.  They can be substantial and amount to thousands of dollars in some situations, so you should make sure it doesn’t negate the benefit of refinancing in the first place.

Are honeymoon rate loans also available for refinancers, or are they just for first homeowners?

They are primarily aimed at first home buyers, but anyone may apply for one including refinancers and property investors.  Because they’re a tool used by lenders to entice customers into business, they can occur at any point during your home loan repayment period when refinancing.

Can I still apply for a First Home Owner Grant if I get a honeymoon rate home loan?

Yes – the type of home loan you apply for won’t affect whether you can get a First Home Owner Grant or other government assistance aimed at helping young people get into the property market.