Experts warns against 'honeymoon rate' on loans as banks try to lure first home buyers

Banks are trying to capitalise on the growing share of first home buyers by luring them into ‘honeymoon rate’ deals that could cost them tens of thousands of dollar extra over the life of a home loan.

Comparison site Mozo found one in 10 loans now offers a generous introductory variable rate, which can look very attractive until the honeymoon period ends and the high revert rates kick in for the rest of the mortgage.

Director of Mozo Kirsty Lamont urged borrowers to read the fine print on “misleading” products that banks market to first home buyers who are desperately trying to break into the property market.

“These deals target first home buyers because it makes the prospect of repaying your mortgage more affordable in the first two years. But these loans essentially line up the pockets of the banks over the long term,” Mrs Lamont said.

“They market it as a solution for first home buyers who are trying to get a foot in the door. But there’s a real sting in the tail so it’s a case of borrowers beware,” she said.

For an average borrower with a $300,000 home loan, this equates to $3423 in additional interest charges each year.

In one of the worst cases, the site found on offer an introductory variable rate of 3.69 per cent, which jumped up by 47 per cent to 5.43 per cent after the honeymoon period ended.

Mrs Lamont said borrowers should do their research and seriously shop around as the onus is on the borrower to negotiate a better rate when that honeymoon period ends.

BIS Oxford Economics Senior Manager, Mr Angie Zigomanis said banks were making the most of recent policy changes in stamp duty and lending crackdown.

“At the end of the day, they’re [banks] targeting first home buyers because they’re trying to capture first home buyer demand with NSW and Victoria having introduced stamp duty exemptions and concessions,” Mr Zigomanis said.

“They’re trying to take advantage of the growth in the owner-occupier market which is holding up better than investor lending,” he said.

Director of Investors Choice Mortgage and mortgage broker Jane Slack-Smith encouraged first home buyers to look at all their options before buying into uncompetitive products.

“It seems really reasonable when you’re looking at the now and the present position. But when first home buyers are exhausting all their savings to get into property they need to concentrate on building up that cash buffer if anything goes wrong down the track,” Slack-Smith said.

“It might be a solution for people who are cash strapped and using every last cent to get their first home but it’s a cloud with a silver lining with a storm that lies ahead when the rate flips,” she said.

Slack-Smith warned borrowers may not be able to refinance after the initial variable rate flips back if banks continue to tighten lending restrictions.

“What it means in this tightening environment that APRA and the banks have actioned is the loans people could get last year may not be approved for refinance this year or another year if they are reassessed,” she said.

She suggested borrowers go to a mortgage broker that compares everything on offer to consider what is best for them.