Save money on interest payments by choosing a honeymoon introductory rate for your mortgage.
Choosing a honeymoon rate for your home mortgage can be a great way to keep your interest costs to a bare minimum for the first part of your loan. In most cases, your honeymoon loan should offer you a reduced interest rate for the first year or two, before then reverting to a higher variable rate.
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During that honeymoon period, your minimum repayments are likely to be much lower than the amount you’d normally pay with a regular variable rate. This can be ideal for helping to get used to budgeting for your mortgage payments.
For example, let’s assume your standard variable rate is 5.49% but you get the benefit of paying just 4.5% for the first two years of your home loan. During the honeymoon period, your minimum monthly repayments are just $1520.06. When the low rate expires and your loan reverts back to the standard variable rate, your payments will increase to $1692.29.
For the first two years of your loan, you can put the $170 per month you save on repayments into other expenses. It’s up to you whether you choose to spend it paying down other debts or whether you want to put it towards your home loan to help pay it off much faster.
One of the interesting parts about inputting your figures into a good honeymoon loan calculator is that you’re able to see how much interest you’re saving by opting for a cheaper rate for the first few years of your loan.
Using a Honeymoon Loan Calculator
Entering your information into a honeymoon loan calculator is relatively easy. Here is a quick breakdown of some of the terms used with these sort of calculators:
- Loan amount: The amount you owe on your mortgage.
- Variable interest rate: This is the standard variable rate you can expect to pay over the term of your loan, not including the honeymoon period.
- Initial interest rate: Sometimes you may find that a honeymoon rate is referred to as the initial interest rate. This is the discounted rate you’ll pay at the start of your home loan.
- Loan term: This is the length of time your home loan is set to run for.
- Repayment frequency: Enter in whether you intend to make your repayments weekly, fortnightly or monthly.
Enter your figures into each field on the calculator and the tool should instantly determine how much your repayments will be during the honeymoon period and how much they’ll be once your rate reverts to the standard variable rate. You should also be shown a graph that shows your timeline for paying it off.
Paying off your honeymoon mortgage faster
With the help of a good honeymoon loan calculator you can also figure out how much sooner you can pay off your mortgage by paying a little more than just the minimum.
Some calculators will show you exactly how much your payments will be and how much interest you can expect to pay on your home loan. However, there are some that will also allow you to enter any additional payments you’ve budgeted for. These types of extra payment calculators can be ideal if you intend to make higher payments during the cheap honeymoon rate period, as you can see clearly how much sooner you’ll repay your debt and how much interest you’re able to save.
Let’s assume that Jane has a mortgage of $300,000. She’s signed up for a two-year honeymoon rate at just 4.5%. After the first two years at the low rate, the standard variable rate reverts to 5.49%.
Jane inputs her figures into a honeymoon loan calculator and sees how much lower her repayments will be during the introductory term. Her budget shows her that she’s able to pay an additional $100 per month off her mortgage right from day one.
By paying this extra amount of money, the calculator shows her she’s able to pay off her mortgage three years and four months sooner. She also saves $41,373.79 in interest charges over the term of the loan.
Lump sum extra repayments
Not everyone has the available cash to spare in their budget to make additional payments every month. However, if you know you’re likely to get a Christmas bonus from work or a nice tax return, you can still make a one-off lump sum payment towards your mortgage.
Using a honeymoon loan calculator that gives you the option to include a lump sum extra repayment at a specified point of the loan is the ideal way to help you save money.
Jane still has the same $300,000 home loan amount and is still opting for the 4.5% honeymoon rate for the first two years. She knows the rate will revert to the standard variable rate of 5.49% once the introductory rate expires.
She also knows she’s likely to receive $3000 on her tax return in 11 months. She intends to use all of this as a lump sum extra payment towards her mortgage.
Using a good honeymoon loan calculator, she can see that her minimum payments are within her budget. She can also see that the lump sum payment only reduces her loan term by almost a year. However, she can see that she saves almost $5000 in interest over the term by contributing that lump sum.
Honeymoon rate comparison calculator
This tool is extremely valuable if you want to compare whether a honeymoon rate on your home loan will save you more money than choosing a discounted variable rate home loan instead.
The object behind these calculators is to work out the interest you’ll pay over the term of your loan for two different types of home loans. This gives you a clearer indication of which loan is better suited to your needs.
Jane has applied for a mortgage with a balance of $300,000. She likes the idea of the honeymoon rate at 4.5% that lasts for the first two years and she knows that the rate will revert to 5.49% once the introductory period ends. However, she also has the option of a discounted variable rate loan with an interest rate of just 5.08%.
Here’s how the comparisons look:
|Loan #1||Loan #2|
|Honeymoon Term||2 years||n/a|
|Total loan term||30 years||30 years|
|Monthly account fee||$8 per month||n/a|
|Total Interest Paid over Loan Term||$608,271.00||$585,559|
In this example, the discounted variable rate home loan ends up being $22,712 cheaper over the term of the loan than the honeymoon rate loan. Jane never would have realised this if she hadn’t taken the time to input her numbers into a good calculator before making her decision.