Is an introductory rate feasible when taking out a home loan?

Posted on Thursday, August 9, 2018 - 14:44

An introductory rate is a special rate that homeowners can take advantage of when wanting to get a head start on their repayments. Some lenders offer a discounted rate for a period of 6 or 3 years to help you manage your home loan effectively. However, introductory rates revert to a higher interest rate at the end of the period leaving homeowners to ask if it is worth taking out in the first place.

How it can work for you

It is possible in a sense to take advantage of a low interest rate to help you effectively manage your repayments. People who tend to choose introductory rate loans tend to choose it for economic reasons such as reserving extra money to pay off other expenses that come with purchasing a home.

It can also ease the financial strain of moving from renting to purchasing a home. Some Australians take out this type of loan to also effectively manage their debt, but there can be a dangerous trap that can leave these good intending home buyers in more debt than before.

The pitfalls

When taking out in introductory rate loan it is important that you are aware of the expiration date on the introductory rate. It is also vital that you calculate that you will be able to cover more than the minimum repayment on your home loan when the rate is still low to take a full advantage of it. The pitfall is when the rate reverts to a higher interest rate, which can be higher than the average home loan on the market. People can get caught out by the ongoing costs of the loan that has now been coupled with the high rates which can push them into a debt spiral.

Calculating the costs

This means one thing. It is important that you choose a loan that comes with features that match your finances. Home loan calculators are a savvy way to know how much you can expect to pay through-out the loan term. Calculating an introductory rate will help you gauge whether it is feasible for your finances.

For example, if you take out a home loan worth $300,000 over a period of 30 years that you are looking to pay off monthly and it has an introductory rate of 4.00% and a variable interest rate at 5.50% for the first 5 years you could be looking at:

  • Introductory term repayment at $1,432.25
  • Variable term repayment at $1,66.28
  • Total interest payable $285,819
  • Total interest if the loan was at a variable rate $313,212

Compare to find something that fits your finances

When it comes to home loans lenders will differ on what rate they offer. You could find that by comparing you would be better off with a home loan that has fixed rates that can be budgeted for throughout the life of the loan.

This means that you can find a loan that has features that are suitable for your finances and also remains at a consistently low rate, unlike introductory rate loans that will revert to a higher rate.

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