The paper, titled 'The effect of mortgage brokers on banks' business models', studies the effects intermediaries have on the UK mortgage market, looking specifically at the increase in mortgages arranged via broker between 2013 nnd 2020, around the period that the Mortgage Market Review was consulted upon and introduced.
Its findings indicated that this rise in broker-arranged mortgages 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'. This, the paper concludes, shifts risk from lenders to the borrowers who are more at risk from future changes in the base rate.
The paper concludes:
"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 (in particular the future base rate). 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. 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."
It does acknowledge, however, that yield curves also play a factor in shorter-term fixed rates being chosen, adding: "While brokers play an important role in shaping households decision-making regarding the length of fixed term, the rate premium between short and long fixed-term mortgages seems to dominate this effect" - with a correlation between yield rates and the rates available on 2- to 5-year fixed term products clear during the period of time sampled in the report. The report adds that this suggests that lenders account for changes in the shape of the yield curve when pricing mortgages with different fixed periods, and that borrower sensitivity to the price they pay initially could explain the trend towards shorter-term fixed rates.
