What is an introductory home loan?

author-avatar By on July 31, 2020
What is an introductory home loan?

Photo by Gia Oris on Unsplash

Introductory home loans can offer attractively-low interest rates, but it’s important to be wary of what happens after the intro period ends.

What is an introductory home loan?

An introductory home loan offers a discounted interest rate for a short period of time, typically one or two years. The rate is usually substantially lower than the majority of rates on the market which is what makes them attractive.

With a lower interest rate, your minimum repayments are likely to be lower for the introductory period, which could help you gradually settle in to a new mortgage. But if you’re savvy, you may opt to ‘make hay while the sun shines’ and take the opportunity to make bigger repayments while the interest rate is low to minimise the loan balance that will be subjected to a higher rate at the end of the introductory period.

The interest rate the introductory loan switches to at the end of the introductory period is known as the ‘ongoing rate’ or ‘revert rate’ - which you may have heard of through fixed-rate loans.

Introductory home loans are usually heavily advertised and promoted by the lender in an effort to attract new customers. Introductory interest rates are usually variable, but one could argue fixed-rates are essentially introductory rates too because at the end of the fixed period they too often revert to a higher variable rate.

See also: Fixed vs variable home loans: What to consider

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

What to consider before taking out an introductory home loan

Introductory home loans may sound great in theory but prior to taking one out there are a number of things you should consider:

1. The revert rate

When the introductory period ends the interest rate will typically revert to a higher ongoing rate. This rate may be considerably higher than the intro rate and less than competitive compared to other ongoing home loan rates on the market. A significantly higher rate could significantly increase your monthly repayments, putting pressure on your finances if you’re unprepared. You should know what the rate will revert to prior to taking out the intro loan, as if it’s considerably higher, it may not be cheaper for you over the life of the loan, compared to other products on the market.

2. The comparison rate

The comparison rate shows you the true cost of the loan by bundling together the interest rate, revert rate and the various fees into a single percentage figure. Introductory home loans can often come with hidden fees or fees not normally attached to regular home loans. The comparison rate can signify the true cost of these fees, as well as the interest rate you’ll be paying for the large majority of the loan, rather than just the intro rate.

3. Features

Features, like redraw and offset facilities, can often make paying off your loan easier, making it easier for you to make extra repayments, or offsetting the amount of interest you’ll pay, hence reducing the life of your loan. Some introductory home loans won’t allow for these features or will restrict the number of extra repayments you can make, due to the lower interest rate you’re receiving. If you need any of these facilities, talk to the lender prior to entering the loan to see if they’re available on the loan.

Pros and cons of an introductory home loan

Pros

Introductory home loans can have a number of benefits which may include:

  • Low-interest rates: Introductory home loans typically boast some of the most competitive interest rates on the market, which is why they’re heavily advertised and can be quite popular
  • Introduction to loan repayments: If you’re a first home buyer, making the switch from rental payments to mortgage repayments can be a massive jump. Having lower repayments in the first year can make this transition smoother.
  • Choice: Many lenders offer intro rates to entice customers, meaning you can easily shop around between each one to find a product which offers the right features and conditions for your circumstance.
  • More cash available: Buying a house involves a lot of upfront costs like stamp duty, home loan application fees, and legal fees just to name a few. Furthermore, if you’re moving into a new place you’ll no doubt want to spend some money to make the place your own. Lower repayments can free up cash to handle both these expenses.

Cons

Introductory home loans can also have a number of negatives which may include:

  • High ongoing rate: Introductory home loans can revert to substantially higher rates at the end of the intro period, possibly costing you far more over the life of your loan than a regular home loan with a lower ongoing rate might have.
  • Restricted features: Given their low rate, lenders might not have a range of features available on introductory home loans, meaning you might not be able to make extra repayments
  • Switch fees: When your intro period ends it’s possible to switch to a different product with the same lender which carries a rate lower than the introductory loan’s revert rate. However this doesn’t always come for free, switch fees can often be applied.

Other ways to save on your home loan

An introductory home loan isn’t the only way you can save money and reduce the life of your loan. Other ways you can save on your loan include:

1. Communicating with your current lender

In today’s highly competitive home loan market, lenders are doing everything they can to hold on to customers. As a result, at the end of your intro period you could try talking to your lender to see if they will offer you a lower interest rate than the revert rate, or perhaps offer you an extension to your intro period. They'll want to keep your business, so they may offer a better deal so you don’t take your loan elsewhere.

2. Refinancing to another lender

If your lender doesn’t want to come to the table or you’re just keen to go elsewhere, refinancing to a different lender could be a good option. You could refinance to another introductory home loan or simply to another loan with a low rate. Make sure the costs of refinancing don’t outweigh the savings you’ll gain from refinancing.

3. Using offset accounts

An offset account is like a savings account linked to your home loan. The money in your offset account is offset against your home loan debt when interest is calculated. This reduces the amount of interest charged on your loan, which could potentially reduce the length of your loan and save you thousands.

4. Opting for fixed-rate home loans

A fixed-rate home loan functions very much like an introductory home loan. You’re locked into an interest rate for 1-5 years and the rates can often be slightly cheaper than variable rates. Much like an introductory home loan, you’re locked into low repayments for a period of time, giving cash-flow certainty and the opportunity to save more money. But as with introductory loans, you’ve gotta be wary of the revert rate.

Savings.com.au’s two cents

Introductory home loans can be a great way to start your home loan journey, potentially allowing for lower repayments in the first year or two of your loan by having a very competitive interest rate.

Before you enter into an introductory home loan it’s vital you know what the rate will revert to at the end of your intro period.

Consider speaking with a financial adviser before making any major decisions.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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Alex joined Savings.com.au in 2019. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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