Mortgage brokers have been directing homeowners towards short-term home loans that come with the danger of escalating interest rates, reports from the Bank of England indicate. Bank experts believe this strategy has been employed so that brokers can profit more substantially from repeated income generated through fees.
According to a BoE research paper, there was a notable increase in the use of mortgage brokers for securing home loans between 2013 and 2020, which aligned with a trend of more households opting for short-term fixed-rate mortgages lasting two to five years. This shift left many households susceptible to increased payments when the Bank escalated the base rate consistently 14 times from December 2021 to August 2023, moving from 0.1 percent to an impactful 5.25 percent.
A detailed working paper by Bank staff Marcus Buckmann and Peter Eccles, examining over 2.2 million mortgages, discovered that in this timeframe “brokers steered households” towards these shorter-duration mortgages “to earn fees more often”. They highlighted: “Households who choose a mortgage with a shorter fixed term are more exposed to risks affecting mortgage rates, in particular the future base rate.”
Mortgage brokers have been directing homeowners towards short-term home loans that come with the danger of escalating interest rates, reports from the Bank of England indicate
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Further caution was issued in their warning: “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.”
Following a 2014 review on the sale of home loans by the Financial Conduct Authority, it became a rigorous recommendation that most mortgages sold directly should incorporate the advice of a qualified advisor, leading banks and other lending entities to adjust their approaches accordingly.
Building societies have opted to hand over the sales of numerous home loans to brokers, rather than bearing the cost of employing their own qualified staff. However, this change seems to have led to brokers attempting to increase their own fees and income by promoting short-term fixed-rate deals, forcing home buyers to return to them for remortgaging every two or five years.
Chris Skyes, Technical Director at Private Finance, expressed his concern to 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.”
Jeni Browne, Business Development Director at Mortgage Finance Brokers, suggested that many home buyers themselves were keen on shorter fixed-rate deals. She stated: “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.”
Sebastian Murphy, Group Director at JLM Mortgage Network, defended brokers, stating: “What the report fails to mention is that the reason wh Brokers often favoured two-year fixed mortgages for their clients during that period because the general trend was for falling rates, which hadn’t yet bottomed out. 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.”