Second Mortgage Rates Have a 50-50 Chance of Falling in 2017

Adam Brand Adam Brand | Operations Director

Interest rates on second charge loans, particularly second mortgages, are already extremely low by comparison. Whether they continue to fall this year or not is unclear. However, if a recent survey among professionals is any indication, there's a 50-50 chance you could get a better rate on the second mortgage at some point in 2017.

A new industry poll conducted by Loan Talk shows that 50% of mortgage professionals believe second charge rates will drop significantly this year. Approximately 33% believe rates are as low as they will go while the remaining 17% think that any further reduction will be negligible.

If you're curious about the differences of opinion, chalk it down to the fact that predicting interest rates has always been a gamble. No one really knows what's going to happen because there are far too many things in the mix. Interest rates can fall one day only to turn around and start climbing the next. All it takes to change things is a little speculation.

In the world of second mortgages, three key things drive interest rates. These are listed below. The track each one takes over the next 12 months will dictate what happens with interest rates. You might get a better second mortgage later this year, but there is no guarantee.

Consumer Demand

Consumer demand heavily influences just about everything related to buying property. From sale prices to the rate of interest consumers pay on their mortgages, the comparison between supply and demand drives prices. To deny it is to deny one of the fundamentals of economics.

Lenders in the second charge market have to consider demand when setting interest rates. Those experts who believe second mortgage rates will drop through this year are basing their assertions on a belief that demand will increase, subsequently increasing the competition among lenders. This suggests that lenders will lower their rates in order to better compete.

The Bank of England Base Rate

Next to consumer demand, the most important factor driving interest rates on retail mortgages is the base rate. Why does the base rate matter? Because it acts as the starting point for establishing interest rates on mortgages. The base rate reflects the amount banks pay for the privilege of borrowing from the Bank of England, so they start with that base rate and then add to it to come up with the retail mortgage rate. When the base rate goes up, retail rates follow. The opposite is also true, at least most of the time.

Bank of England Money Supply

The Bank of England does something else that ultimately affects interest rates: it manipulates the money supply in order to keep the economy as stable as possible. When the money supply is restricted, cash becomes more valuable and interest rates tend to stay put. A system flush with cash reduces the value of currency and generates inflation. This typically causes interest rates to rise.

It's interesting to note that the BoE constantly has to walk that fine line to keep the base rate and the money supply in perfect balance. Otherwise, the effects on the economy would be stifling.

There are other things beyond the three listed here that affect the rate consumers might pay on a second mortgage. It would appear from the Loan Talk survey that 50% of industry experts expect second mortgage rates to fall this year while the other half are not so sure. How will it play out? We'll know at the end of the year.


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