Brokers encourage borrowers to choose short-term fixed rates but also favor smaller lenders, BoE finds

ONE working paper from the Bank of England looking at the effect of growing intermediation in the mortgage market between 2013 and 2020 has found that brokers encourage borrowers to choose short-term mortgages.

The report found that shorter fixed-rate mortgages are “more exposed to risks affecting mortgage rates,” particularly the future base rate.

A growth in the share of short-term fixed rates “transfers risks regarding the future level of the base rate from lenders to households, which are less able to hedge and manage these risks”.

It added that it is also speeding up the “transmission of monetary policy” so that base rate rises will affect household finances more immediately.

There are also impacts on lender liquidity, as lenders rely on short-term funding to fund mortgages, which can create a “maturity mismatch between assets and liabilities”, but this becomes “less acute” with people opting for shorter fixed rates.

Increased brokerage gives smaller lenders the opportunity to diversify

The Bank of England added that Review of the mortgage market had affected the business models of lenders, especially smaller lenders, and had therefore increased competition.

The report noted that brokers allow smaller lenders to access customers in areas where they may not have a “strong customer base” and allow smaller lenders to “increase the geographic diversity of their loan portfolios.”

“Increased access to customers also allows smaller lenders to specialize their mortgage books and compete more effectively against larger lenders on specific products and gain market share. In particular, it seems that smaller lenders specialize in mortgages with long terms and high loan-to-value (LTV),” it is explained.

The report said increased brokerage on smaller lenders’ profitability “may be ambiguous” as they may grow market share but their margins may be squeezed by increased competition.

The BoE said increased geographic diversification through increased intermediation could “lead to increased lender resilience” as it ensures smaller lenders are “less exposed to sharp falls in house prices” in regions containing the most branches.