Source: Melbourne Investor Feb/March 2007

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Making The Most Of The Honeymoon

Source: Melbourne Investor Feb/March 2007

Written by Ron Moore

LoansInsurance.com.au

Ron Moore, Senior Lending Manager for LoansInsurance.com.au has 30 years experience in banking and finance (in particular mortgage products). Ron is a member of Finance Brokers Association (FBAA) and Mortgage
Industry Association of Australia (MIAA) .


 

Making The Most Of The Honeymoon

The finance market is very competitive with a host of products – from simple principal and interest loans to more tailored combinations designed to give both security to the lender and flexibility to the borrower.

Interest rates have been low for some years now, compared to the heady days of the late ’80s, where they spiraled upwards. Interest rate rises in the 1980s caused even the more conservative borrowers to see their equity eroded as their loan to value ratios grew and their property values fell. Interest rates are now the focus of most investors and managing interest is thus a vital element in wealth management. There are several options available including the ‘honeymoon’ rate.

Honeymoon rates

Banks have offered ‘honeymoon rates’ for residential loans for many years. During the lower interest startup period, property buyers have enjoyed some breathing space in which to recover from purchasing costs, home furnishing or improvements. They have had time to settle into their new loan. These honeymoon periods appealed particularly to first home-buyers.

A relative newcomer to the loan products on offer today is the interest only loan, at under the margin rate, which capitalises the unpaid interest into the loan principal but enables the borrower to use the freed up cash flow for other purposes.

This lower interest – which currently can be below 4% – could make welcome amounts of cash available for people in a range of situations:

• home owners wanting to pay other more expensive loans/credit cards off first
• investors wanting to increase their cash flow to maximise returns in other areas such as the stock market or business purchases
• people wanting to consolidate their debts
• small business owners needing additional cash flow to fund expansion or improvements
• farmers who are experiencing drought induced hardship but with potential to recover in future seasons.

Use it wisely

All applications are considered on their merits and it would be unwise to use the extra cash available each month for frivolous purchases or non-appreciating assets, as the foregone interest is added to the loan principal – making the total amount owed grow over the term of the low interest period.

Mortgage brokers with training and experience in these sorts of low interest products can provide detailed information about how the loans can best be tailored to the individual borrower’s needs, as loan durations are sometimes negotiable, as can the length of time the lower interest period can be applied.

The finance market is always developing ways of attracting and keeping new business, just take care that if you enjoy an interest rate “honeymoon” that it remains a happy and profitable experience.