BoE paper finds broker advice for short-term fixes left borrowers more vulnerable
Homeowners in the UK have been left vulnerable to rising interest rates partly due to mortgage brokers steering borrowers towards shorter fixed-term loans, according to new research by the Bank of England (BoE).
The study found that a surge in the use of brokers during the 2010s coincided with more households opting for two- or five-year fixed mortgage deals instead of longer-term options. Central bank analysts suggested that brokers may have encouraged these shorter terms to generate additional fees when borrowers refinanced at the end of their fixed period.
“Our findings indicate that this rise coincided with more households choosing mortgages with a short fixed term, due to brokers steering households towards these mortgages to increase fees from repeat business,” it said.
This trend, the research indicated, heightened the financial strain on homeowners as interest rates surged in 2022 and 2023 to combat inflation. Unlike countries such as the United States, where borrowers often secure fixed rates for decades, most UK homeowners lock in their mortgage rates for only a few years.
Data from Moneyfacts showed that the average two-year fixed mortgage rate peaked at nearly 7% in mid-2023, before settling to around 5.5% in recent months.
“Households who choose a mortgage with a shorter fixed term are more exposed to risks affecting mortgage rates,” said Marcus Buckmann and Peter Eccles, the authors of the BoE working paper. A shift towards mortgages with a short fixed term also speeds up the transmission of monetary policy, since changes in the base rate impact household finances more immediately.”
The study highlighted a sharp increase in broker involvement, with mortgages arranged by intermediaries rising from 57% in 2013 to 81% in 2020 among first-time buyers. This trend was partly driven by stricter regulations requiring borrowers to seek advice from qualified professionals. The research further revealed that a 10-percentage-point increase in broker intermediation in a region led to a 1.8 to two-point rise in the share of short-term fixed mortgages.
Short-term mortgages have played a significant role in the transmission of monetary policy, forcing households to cut spending as rates climbed. Higher repayments on these mortgages reduced disposable income, while rising rates also dampened economic demand by incentivising savings and curbing asset prices.
The study also showed that mortgage brokers played a crucial role in helping smaller lenders expand their reach, improve geographical diversification, and compete more effectively against larger institutions.
“However, the impact of increased broker intermediation on smaller lender profitability might be ambiguous, since on the one hand, these lenders are able to grow market share but on the other hand, margins may be squeezed as increased competition puts downward pressure on rates,” Buckmann and Eccles pointed out.
“Finally, since regional house prices are not perfectly correlated, geographical diversification via increased broker intermediation can lead to increased lender resilience. In particular, brokers ensure smaller lenders are less exposed to sharp drops in house prices in those regions where they have most of their branches.”
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