Banks are offering ‘honeymoon rate’ deals on loans in an effort to grab a share of the growing number of first home buyers. This deal could cost buyers tens of thousands of dollars more over the life of a home loan.
One in 10 loans now offers a low initial variable rate, according to comparison site Mozo. This can seem appealing to first home buyers until the honeymoon period terminates and the high revert rates takes effect for the remaining life of the mortgage.
First home buyers should be wary of these deceptive offers as they are used by banks to grab a share in the property market. It appeals to buyers because paying your mortgage is affordable for the first two years. In reality, those loans basically will just make banks richer over the long term.
For example, an ordinary borrower with a $300,000 home loan would have to pay extra interest charges of $3423 annually.
One of the worst cases Mozo uncovered was an offer with an introductory variable rate of 3.69%, which went up to 5.43%, up 47%, after the honeymoon period ended.
Borrowers are advised to do research and earnestly search for the best deal because it is the responsibility of the borrower to bargain for a better rate when the honeymoon period terminates.
New laws aiding banks
According to a senior manager at BIS Oxford Economic, banks were capitalising on the new policy changes in stamp duty and lending crackdown. Banks are trying to attract first home buyers as part of efforts to capture first home buyer demand with newly introduced stamp duty exemptions and concessions in NSW and Victoria.
First home buyer tips
Mortgage experts advise first home buyers to study their options before getting into a disadvantageous deal. The offers, at first, look tempting when you look at the terms. But if you are depleting your savings to buy a property you have to focus on shoring up your cash buffer in case of emergency.
When the rate changes borrowers may fail to refinance if the banks continue to implement stricter lending policies. It is recommended that borrowers turn to a mortgage broker that compares all options to help clients choose what’s best for them.
Let us know if you’d like help finding a mortgage broker in Newcastle.