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Introductory rates, or ‘Honeymoon Rates’, are where you are offered an extra low interest rate in your first year. It is these offers that are often heavily promoted by lenders.

However there is an old saying:

This is as true here as it is anywhere and exactly what you must keep in mind when looking at Introductory interest rates.

How does it work?

The banks need to make their money and with Introductory rates they generally do so in the following ways:

• By locking you into the loan for several years with additional fees if you try to refinance or pay out the loan.
  
  
• After you come off the ‘introductory rate’ you pay full standard variable rate and are not eligible for discounts (or they are limited to less than you would otherwise be eligible for).

So whilst you might save in the first year you may end up paying much more interest overall during the period you are ‘locked in’.

When is it used?

Honeymoon rates may be beneficial in certain circumstances. Generally they can be summarised as follows:

• When your loan amount is small and / or you would be ineligible for other discounts anyway.
  
  
• If you need to minimise repayments in year one but you expect reasonable lump sums of cash to reduce the loan size considerably within the introductory period.
  
  
• You wish to purchase now but your ability to service the loan is tight but you reasonably expect an increase in income before the end of the discount period.

Features

• Additional repayments at any time
• Usually redraw is available
• May be Principal & Interest or Interest Only.
• Often only available for owner occupier home loans.