An introductory loan, otherwise known as a ‘honeymoon mortgage’, is aimed at a first home buyer by offering a lower interest rate than the lenders standard rate for the first 12 months or two years, or some other prescribed period, so that the home buyer can have the extra cash flow available to set up the home, start a family or get settled in a career.

It can also give the home buyer an opportunity to make considerable additional repayments with any extra cash that might be available, in order to lower the principal and shorten the length of the loan.

Because home loans are a long term investment a lender is able to offer an introductory loan early in the life of the loan and make up for the loss of interest during the remainder of the mortgage. However in this modern age the home buyer can also take advantage of the offer to give him or her real savings over and above that intended by the lender. For instance a lawyer in the United States became quite well known for his practice of switching loans whenever his lenders honeymoon period expired and taking up another loan offering a new honeymoon period. He argued that the cost of doing so was worth his while economically.

Not all of us would be willing to take it that far but it does offer up certain opportunities that can work in your favour. This can take the form of making additional repayments as mentioned previously, especially during the honeymoon, or introductory period, while the interest rate being charged is at a low rate. The practice of lenders locking the home buyer into the home loan at the higher interest rate, after the introductory period has expired, has virtually been discontinued but it is still worth checking the fine print to make certain that it is not part of your introductory loan.

In the past, and still true today, borrowers had little concern about switching to another provider if they felt the interest rate on their credit card was excessive. Credit card providers actually exploited this practice to the utmost by offering interest free periods for people switching to their card. Introductory loans are a little different although not many borrowers will go as far as the American lawyer. While home loan borrowers remain reluctant in switching mortgages to simply gain the advantage of a lower interest rate for one or two years, lenders will continue the offer aimed at the first home buyer, and of considerable value to the informed home buyer generally.

Although a low interest rate is the carrot used by most lenders in enticing home buyers to their introductory loan offer, usually the lowest rate you will find being offered by any lender anywhere, some lenders prefer to offer a tracking loan for the first one or two years of their introductory loan offer. A tracking loan can take one of two forms. In one the tracking loan will be tied to the official interest rate and in the other it will be tied to the average rate being charged by a number of the major banks and then discounted by one or two percent. In this manner the borrower will know that they are getting a cheaper interest rate than that being charged on the average bank mortgage loan.

Another introductory loan that some lenders offer in order to entice new customers to their product is that of an interest free home loan for an initial period of usually from one to three years, after which time it too reverts to a standard variable interest and principal repayment. The beauty of an interest only introductory loan is the fact that here too you can make additional repayments without having to do so and therefore lower the principal at a time when you can gain the biggest advantage of lowering the end result by using the principle of compound interest working against you as the lender is putting all their hopes on.

A lender will, of course, earn more if the interest free period remains exactly that. A period in which no repayments are made off the principal owing during that time, this will extend the term of the loan by that amount and give the lender a greater profit with increased interest being charged on interest. If you can make repayments in that time you can negate much of this profit taking by lowering the initial amount of principal especially in the early days when the loan is at its maximum.

Introductory loans can also be advantageous to those who simply want the benefits of a low repayment whilst still young and earning a lesser income than they will in the future as they go forward in their careers. It can mean a lot in the way of lifestyle as well as give you the opportunity to carry out renovations which will finish up adding value to the house. A very important benefit if you plan on selling the property after the introductory loan period, however fashioned, is finished.

An introductory loan can be of great advantage as long as you remember that it was primarily instigated to help the lender increase their profit while gaining more new business. It can equally be used to benefit the home buyer in many ways at the same time.