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Pundits split over honeymoon rates

Industry pundits are divided over the benefits of honeymoon rates for borrowers, with some claiming that these encourage borrowers to assume more debt than they can afford.

As part of a survey conducted by rate comparison website finder.com.au prior to the Reserve Bank of Australia’s cash rate announcement, 30 industry pundits were asked about their view on introductory or “honeymoon” rates.

Of the 17 industry pundits that responded to the question, 41 per cent said that such offers have a negative effect on borrowers, with a majority of the group claiming that these encourage customers to take on more debt than they can afford.

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Conversely, an additional 41 per cent stated that honeymoon rates were good for borrowers and cited the cost-saving benefits involved.

The remaining respondents (18 per cent), which included professor at Monash University Ben Crosby, were undecided.

However, Mr Crosby said: “[It] depends whether borrowers have the capacity to make additional repayments in these early years. If so, [honeymoon rate loans] are a very good deal.”

Finder’s insights manager, Graham Cooke, added that he believes honeymoon rates provide first home buyers (FHB) with an opportunity to enter the property market.

“Often the honeymoon rate is 1 percentage point below the standard rate, which is why honeymoon rates can be suitable for first home buyers looking to keep their repayments down within the introductory period,” Mr Cooke said.

“Honeymoon rates can be a great way for first home buyers to get a foot on the ladder, but they need to be prepared for higher interest costs once the temporary rate expires.

“As we expect some rate rises over the next two years, borrowers need to be comfortable with paying a rate that’s at least 2 percentage points higher than their current revert rate.”

Further, Finder also asked industry pundits to predict the RBA’s next rate move. Of the 30 pundits who responded to the question, 88 per cent said that they expect the next cash rate move to be up.

The respondents were also asked to predict the timing of the next rate move, with 38 per cent stating that they expect the RBA to pull the rate trigger in the second quarter (April–June) of 2019, 24 per cent expecting an increase in the fourth quarter (October–December) of 2019, and 19 per cent expecting the central bank to hold the cash rate until 2020.

“There are now very few predictions for a rise before the second quarter of 2019,” Mr Cooke added.

“It’s widely believed the cash rate will remain stagnant for some time now, but this hasn’t stopped lenders from lifting rates independently of the Reserve Bank, which we witnessed late last week.

“Westpac and Suncorp were among the first banks to increase home loan rates in response to offshore funding pressures, and many are keeping an eagle eye on the market for further announcements to come.”

However, speaking to Mortgage Business, economist at Market Economics Stephen Koukoulas, and senior economist at AMP Capital Shane Oliver, noted that a rate cut from the RBA was increasingly likely.

Mr Koukoulas said: “It’s still highly conceivable that the next move in rates is down, not up, and that would take an about-face from the RBA who have said the exact opposite.”

Mr Oliver added: “I wouldn’t advocate a cut at this stage, because I don’t think things are that bad, but I certainly wouldn’t rule it out at some point down the track.”

[Related: RBA announces cash rate decision]

Pundits split over honeymoon rates
rates for borrowers, mortgage, industry pundits
mortgagebusiness

Charbel Kadib

Charbel Kadib is the news editor on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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