Borrowers warned over honeymoon loans

Lenders are marketing these loans to borrowers looking to enter an increasingly unaffordable housing market

Borrowers warned over honeymoon loans

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Comparison site Mozo has warned borrowers against taking out seemingly generous honeymoon rate deals that can end up costing them tens of thousands of dollars in extra interest.

Some lenders are marketing honeymoon loans as a solution for first homebuyers who are looking to enter an increasingly unaffordable property market. But these loans might not always be in their best interest when taking into account the high revert rates on some of these products, Mozo director Kirsty Lamont told Australian Broker.

“Honeymoon rates can look very attractive to borrowers, but they can also be very misleading,” said Lamont.

She said the mistake of failing to check the fine print can end up costing borrowers tens of thousands of dollars in extra interest over the loan’s term.

Mozo found that borrowers on introductory variable rate home loans could be paying up to 174 basis points -- the difference between the introductory and the revert rates -- more after the honeymoon period ends. This equates to $3,423 in extra interest charges each year for a borrower on a $300,000 home loan.

The company said that its database shows nearly 9% of variable rate home loans now offer a honeymoon period.

Lamont said these home loan deals can be “extremely profitable” for lenders if borrowers do not refinance when the introductory period ends. 

She advised borrowers taking advantage of such deals to review the loan before the introductory rate ends and to compare the revert rate against the rest of the market.

For brokers, she said taking a longer term view of a loan's competitiveness will help ensure their clients do not make a costly mistake.

"Good brokers no doubt take into consideration the best loan fit for their customers based on both their current circumstances and the longer term competitiveness of the loan," said Lamont.

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