Mortgage brokers 'steered' home buyers to riskier deals to boost their own fees - report

According to the Bank of England, mortgage brokers have been "steering" homeowners towards short-term home loans that carry a risk of higher interest rates. The Bank's experts suggest this was done so brokers could profit more from fees due to repeat business.

A research paper by the Bank found a surge in the use of mortgage brokers for home loans between 2013 and 2020, coinciding with more households opting for short-term fixed mortgages of two to five years. This left households facing higher payments when the Bank raised the base rate 14 times consecutively from December 2021 to August 2023, from 0.1 percent to 5.25 percent.

A working paper by Bank staff Marcus Buckmann and Peter Eccles, which reviewed more than 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, particularly the future base rate."

They also 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 home loan sales by the Financial Conduct Authority in 2014 ruled that most mortgages sold directly to customers should require a qualified advisor, reports the Express.

Banks and building societies have shifted the responsibility for selling many home loans to brokers, avoiding the expense of hiring their own qualified personnel. This move has seemingly led brokers to promote short-term fixed-rate mortgages, ensuring that homeowners return for remortgaging services every few 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."

He added: "As a broker, we need to have a client's best interests at heart."

Meanwhile, Jeni Browne, Business Development Director at Mortgage Finance Brokers, pointed out that many home buyers actually prefer shorter fixed-rate deals. She told Mortgage Strategy: "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."

She also noted: "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, has come to the defence of brokers in light of recent criticisms. He explained: "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."

He further justified their actions by asking: "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."