It’s a TRAP, the risks of introductory rate loans

I thought I would share my views on introductory rate loans as I have been getting a lot more enquires on them. Now I not saying they are all bad but for some customers they can be a trap and can cost you a lot more in the long run.

What is an introductory rate loan ?

This is when the bank will offer you a extra discount for a period of time and after that period of time the discount would change ( they would reduce the discount & your rate will go up ). Example: if the standard rate was 5% and they offered you a 1.5% discount for 2years and after that 2years your discount would change to .9%.

Now many people would say “just refinance” and yes this would be a good time to look at moving your loan but what happens if you can’t. I have seen many cases when customers are looking to move but they can’t, these are some of the reasons: The property they own has fallen in value and they don’t have the equity to move, their situation has changed like had a child or changed jobs, they have reduced their hours worked, they have become self-employed or like many cases in today’s market they now don’t have the borrowing capacity even when their situation has not changed.

If you are one of those customers that can’t move you are now locked into a bank product with a much higher rate than you could get somewhere else and it can really hurt. If we used the example above with a $650,000 loan your repayments would start at $2918 per month and after the 2years would jump to $3,140 that’s $222 per month extra or $2,664 per year extra, $13,320 over 5years.

So all I’m saying is for some customers these cheap rates can be fantastic as long as they have the ability to move after the rate discount changes but if you don’t it can cost a lot more in interest.

As always if you would like to discuss these intro rate offerings or any other options please give us a call

Shannon Gibbons 0417131057