Mortgage brokers “steered” homeowners towards short-term home loans which carried a risk of higher interest rates, according to the Bank of England.
Experts at the Bank suggest the reason for this was so that mortgage brokers could cash in because they would make more income from fees due to repeat business.
A BoE research paper found there was a surge in the use of mortgage brokers for home loans between 2013 and 2020 and that this coincided with more households choosing short-term fixed mortgages of between two and five years.
It said this left households facing greater payments when the Bank raised the base rate 14 times in a row between December 2021 and August 2023 from 0.1 percent to 5.25 percent.
A working paper by Bank staff Marcus Buckmann and Peter Eccles, which reviewed over 2.2m mortgages, found that during this period “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.”
And they warned: “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.”
A review of the sales of home loans by the Financial Conduct Authority in 2014 ruled that most mortgages sold direct to customers should require a qualified advisor.
As a result, banks and building societies decided to pass over control over the sales of lots of home loans to brokers, rather than taking on the cost of employing their own qualified staff.
However, it appears the net effect of this change was that the brokers tried to boost their own fees and income by pushing short term fixed rate deals so home buyers would have to come back to them to remortgage every two or five years.
Private Finance technical director, Chris Skyes, told Mortgage Strategy: “In terms of brokers pushing borrowers towards shorter term fixed rates for the more frequent commissions, this is scary if true and I wouldn’t say reflects the entire industry.
“As a broker, we need to have a client’s best interests at heart.”
Mortgage Finance Brokers business development director Jeni Browne suggested many home buyers themselves were keen to have shorter fixed rate deals.
She said: “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.”
JLM Mortgage Network group director Sebastian Murphy defended brokers, saying: “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.”
