Property 101: What is a 'honeymoon rate'? Home loan terms explained

Buying a first home can be in some ways, metaphorically, a honeymoon, and we are not talking here of just sentiment or the first-home buyer grant. 

There is also the 'honeymoon rate', which is basically a lower interest rate offered for a short time at the start of a home loan by the lender or bank to draw in borrowers. Usually, such a rate is for a period of 1 to 3 years. The lender will revert to the variable rate once the ‘honeymoon’ period ends.

A key benefit of the honeymoon rate is that it allows new borrowers to get used to a loan, according to a post by mortgage broker John Pellegrini in www.mortgagechoice.com.au. The lower interest rate makes it easier for them to meet the home loan repayments. Therefore, this type of loan can be very popular in some circumstances.

But while the honeymoon option sounds like a boon for first-home buyers, once the rate reverts to the more normal variable rate, a buyer may discover that it is not as competitive. 

Hence it is important to do your research and be aware of the interest rate the mortgage will revert to once the ‘honeymoon’ is over. Best to speak to lenders and compare the various rates before making that decision.

Depending on the home buyer’s circumstances, it might make more sense to opt for a home loan with a basic variable interest rate rather than a honeymoon rate, adds Pellegrini.  The choice should take into consideration longer term requirements to figure out which mortgage product will save money in the long run.