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July 31, 2014 – The UK mortgage approvals saw a rise in June, after declining from February to May; amid new stricter lending rules imposed by banks.

According to the Bank of England, after a four month decline and witnessing an 11-month low of 62,007 in May, the mortgage approvals rose to a four month high of 67,196 in June.

The implementation of tighter lending policy at the start of the year by high street banks and building societies was responsible for the changes witnessed in the mortgage approvals over the first two quarters of the year. The introduction of the Mortgage Market Review in April, which was designed to curb the excessive lending seen in the run up to the last housing market crash, further compounded the situation.

Mark Carney’s view of the hot housing market being the biggest threat to the UK’s economic recovery has further frightened buyers and lenders. Even though there has been an increase in the mortgage approvals for June, the approvals are still well below the 74-month high of 76,214 seen in January. This points out that the demand has declined because of record prices and the fact that under the new rules fewer people are managing to secure a mortgage.

The housing market has also witnessed some changes, with Right move reporting the first asking price falls of the year at the start of July and Home track announcing that it is now taking twice as long to sell your house in London as it did in March.

Howard Archer, chief economist at IHS Global Insight says “Nevertheless, the appreciable rise in mortgage approvals reported by the Bank of England in June fuels uncertainty as to whether the recent loss of momentum in housing market activity is likely to be lasting or just a temporary development related to changing mortgage regulations, and whether there will be a significant easing back in house price growth.”

Archer further adds on that “We take the view that while house prices will highly likely keep on rising over the coming months, it is probable that the gains will be more restrained compared to the recent peak levels.”

To Fix or Not to Fix?

If you are about to buy a house or you are about to refinance your home or investment loan you may be asking yourself, should I fix my loan or not? Everyone wants to choose the perfect home loan and so, no one wants to commit the mistake of choosing the wrong loan rate type. The question is more important especially now with interest rates being at an all time low.

To help you decide you need to know – what is the difference between a fixed rate and a variable rate home loan?

What are Fixed Rate Home Loans?

With a fixed rate home loan, you will have the assurance of knowing:

>> What your repayments will be over a set period of time

>> What your interest rate charges are over the life of the loan

>> That you have the ability to plan your finances and stick to your budget, even in times of economic uncertainty

>> That when interest rates rise, your repayments will not increase

>> That you do not have to contend with varying loan payment amounts that will fluctuate with interest rate movements

>> That you have the flexibility of locking in your fixed rate

What are Variable Rate Home Loans?

A variable rate home loan is a very popular product in the lending market and a very competitive product amongst the lenders/credit providers. A variable rate home loan allows you to:

>> Take advantage of falling interest rates when the Reserve bank decides to drop their official rates

>> Take advantage of inclusions such as, a 100% offset account, free additional repayments and redraw facilities

>> Take advantage of the equity you have built-in your home by taking a line of credit option

>> Make unlimited extra repayment each month so you can pay off your loan faster

Do You Want a Compromise between Fixed and Variable?

If you are uncertain between choosing between a fixed or variable interest home loan, you may consider a split loan. It is also known as a split rate loan. A Split Loan allows a mixture of security and flexibility, such as:

>> A portion of the repayments can be at a fixed interest rate, and

>> Another portion of the repayments can be at a variable interest rate

What will I lose by Fixing my Home Loan?

Here are the disadvantages of fixing your home loan:

>> Interest rate drops will annoy you – If interest rates go down below your fixed rate, you will be repaying more than the variable rate and you will not benefit from the rate drop

>> Can I make extra repayments? – Extra loan repayments are often not allowed if you have chosen a fixed rate, or may only be allowed with a fee. Variable rate loans usually allow you to make extra repayments at no cost

>> Break fees – Fixed rate loans may also have a break fee if you change or pay off your loan within a set period (e.g. if you sell your home)

>> No Repayment Holiday is allowed when you have a short-term financial difficulty

>> No offset account and no introductory rate are available to you

>> Cannot be used for business purposes, or building/construction loans or bridging or “off the plan” loans

Are there any Disadvantages of a Variable Rate Home Loan?

A Standard Variable Rate (SVR) home loan is one of the most popular loans available. However, you still need to make your own comparisons of the features, benefits and flexibility. Even though a variable rate loan is very popular, there are some disadvantages, such as:

>> The interest rate and repayments can rise or fall at any time

>> Changes in the interest rate are at the discretion of a lender and they are meant to be broadly in line with market condition

>> You cannot arrange a rate lock

>> You cannot pay Interest in Advance in some circumstances

How to choose theHome Loan that’s perfect for you?

It is very crucial to spend time in choosing fixed rate or variable rate. If you choose the wrong option, you will end up with an uncomfortable mortgage for a very long time. So, spend some time researching recent rate movements. If you think that the loan rate may increase in future, you can opt for fixed rate loans. And, if you believe that there are chances of further reduction in interest rates, you can select the variable rate loan.

It is also important to speak to a home finance expert who has thorough knowledge of both the fixed and variable interest rates available in the market. He/she will be able to guide you in a better way and will help you in structuring your home loan according to your needs.