A BoE research paper has stated that borrowers were left exposed to later rate rises as a result of brokers ‘steering’ them towards short-term mortgages to “increase fees from repeat business”.
There was an increase in the use of brokers for home loans between 2013 and 2020, a period which also saw more household choosing short-term fixed mortgages between two and five years.
This invariably led to larger payments when the basic rate was increased 14 times in a row by the BoE between December 2021 and August 2023, which saw it grow to 5.25%.
Bank staff Marcus Buckmann and Peter Eccles reviewed over 2.2m mortgages for their paper – called ‘The effect of mortgage brokers on banks’ business models’ - finding that “brokers steered households” towards shorter mortgages “to earn fees more often”.
They added: “Households who choose a mortgage with a shorter fixed term are more exposed to risks affecting mortgage rates, in particular the future base rate.”
“An increase in the share of mortgages with a short fixed-term transfers risks concerning the future level of the base rate from lenders to households, who are less able to hedge against and manage these risks.
This move “speeds up the transmission of monetary policy, since changes in the base rate impact household finances more immediately”.
They argue that borrowers started to rely more heavily on brokers to avoid the increased cost of seeking advice, which was required after the introduction of the Financial Conduct Authority’s 2014 Mortgage Market Review. This ruled that a qualified advisor was needed for most mortgages sold directly to customers.
JLM Mortgage Network group director Sebastian Murphy points out: “What the report fails to mention is that the reason why brokers were placing many mortgage customers on two-year fixes during those years was that rates, in general, were falling but had not yet reached a floor.
“Why would you recommend a five-year fix, for example, at a higher rate when you believed rates would continue to fall – as they indeed did.
“Instead, advisers prioritised getting their customers onto lower LTVs by recommending two-year rates, in anticipation of borrowers then being able to access lower rates in two year’s time due to a combination of mortgage product rates having continued to fall and customers being able to secure lower rates by dint of them having brought down their loan to values.
Murphy adds: “However, by the late 2010s/early 2020s, the markets were suggesting that rates had bottomed out, and what we find is that at this point, advisers began to recommend more five-year fixes which has effectively saved a lot of mortgage borrowers, given the tumultuous nature of mortgage pricing particularly since the end of 2022.”
Mortgage Finance Brokers business development director Jeni Browne adds: “The assumption that brokers are steering clients to shorter term fixed rates for their own gain feels disingenuous.
“Many borrowers prefer two- or three-year fixed rates because of the shorter early repayment charges and thus flexibility they bring.
“We need to remember that the study covered a period of time when rates had been low for a long period, so taking a two-year fixed rate would have been perceived as less risky as interest rate volatility was simply not present.”
