When you start shopping around for a home loan, you might discover that a number of lenders have what’s called an “introductory rate”. That is, you will be paying one particular interest rate for a set period, before switching over to a different rate for the remainder of your loan.
These can be extremely beneficial, and are well worth investigating while comparing your home loan options. However, just like anything else in finance, you have to ensure that you know exactly what you are getting yourself into.
Here are a few questions you should ask yourself before taking on a loan with a honeymoon period.
What will the new interest rate be?
This is very basic, but you would be surprised by how many people fall head over heels in love with the introductory rate and forget to keep this very simple question in mind. While you will be paying less in the short term, you could be losing out in the long run.
Remember, most loan last 25 to 30 years – and most of that will be on the second rate.
How long will it last?
Introductory rates, by their very definition, have an expiry date. What you need to know is exactly when that is. Usually, they will last one or two years before switching over. Are you banking on having a higher income to cover the added costs?
Be sure in your planning so you don’t lose out in the execution.
What happens if you can’t repay?
Always have a back up plan when it comes to money. If you suddenly find yourself losing your income for whatever reason, how much will the damage be after the interest switchover? Have you discussed the option of refinancing to a lower rate if this does occur?
Remember, an introductory rate gives you a couple of years of easy repayments – don’t waste the chance to improve your relationship and credit score with your current lender. If it does come down to refinancing, ensure that you find a good mortgage broker to help widen your net!