Mortgage brokers may be steering borrowers towards two-year fixed rates rather than five or more, which allows them to collect commission more often, a Bank of England study shows.
The study, which covers the period 2013 to 2020, says those going through a mortgage broker are more likely to opt for a shorter-term fix than those who apply direct to the lender.
Mortgage brokers are paid commission by the lender, which is typically about 0.35 per cent of the total mortgage value.
Some brokers also charge the borrower fees which are often between £500 and £1,000.
According to the Bank of England report, this creates an incentive for mortgage brokers to steer households towards a mortgage with a shorter fixed term.
Two-year fixes are popular at the moment, in part because some borrowers think mortgage rates will go down in the near future.
Shorter deals: A higher proportion of customers fix for two years when using a broker compared to those that go direct to the lender, according to the Bank of England
Santander recently said almost two thirds of its customers were opting for two-year fixes, with just over a quarter choosing to fix for five years.
The Bank of England study also found that regions in which brokers were more commonly used, saw a slight increase in the proportion of mortgages with a short fixed term.
This suggests that brokers play an active role in steering households towards mortgages with a short fixed term.
The study concluded: ‘Our results suggest that brokers encourage households to choose short fixed-term mortgages.
‘Households who choose a mortgage with a shorter fixed term are more exposed to risks affecting mortgage rates.
‘Hence, 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.’
Most mortgage brokers are regulated by the Financial Conduct Authority.
Britons prefer two-year mortgages
While this evidence suggests that some brokers might steer households into mortgages with a shorter term fix, there are other factors at play.
The Bank of England also suggests that less financially sophisticated people are more likely to choose a short-term fixed mortgage, and also more likely to seek help from a broker rather than go directly to a lender.
Two-year fixes were also typically cheaper than five-year fixes between 2013 and 2020, and borrowers who stuck to shorter fixed rate deals would have saved money in many cases.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘It may be a little too simplistic to suggest brokers are only thinking of themselves and a refinance two years down the road.
‘Even the authors of this study find it inconclusive – it refers to “suggestive evidence that brokers may steer households into mortgages with a short fixed term” but we cannot confidently conclude that this is the case.
‘There are many reasons why a shorter-term product is selected, including personal or financial events, budgetary requirements, borrower expectations and so on.’
Mark Eaton, chief operating officer of lender April Mortgages says the narrow range of mortgage options in the UK might be to blame.
‘Brokers are limited to the range of products available to them, which has historically been dominated by two- and five-year deals,’ he said.
‘To truly serve borrowers’ best interests and help them plan for the long term, lenders must step up by introducing more diverse, longer-term options with fairer early redemption penalties and a balanced fee structure.
‘This is a standard practice across much of Europe, where short-term mortgage products are far less common.
He also suggests that brokers could be given more commission for selling longer-term mortgages.
‘Brokers need to be fairly compensated for considering these modern, long-term alternatives,’ says Eaton.
‘Offering the same commission for both short- and long-term products fails to incentivize brokers to give equal weight to longer-term fixed-rate solutions that can offer greater value and security to borrowers.’
