(Bloomberg) — British homeowners were left particularly exposed to rising interest rates after mortgage brokers convinced them to sign shorter-term deals, according to research by the Bank of England.
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Its analysts said that a jump in the use of brokers for home loans during the 2010s coincided with more households choosing short-term fixed mortgages.
Brokers encouraged people into these deals in order to earn extra fees every time a borrower had to refinance, according to the working paper. The practice may have increased the degree to which homeowners were hit by higher repayments when interest rates were used to combat soaring inflation in 2022-23.
In many countries including the US, households lock in mortgage rates for decades. However, borrowers in Britain typically only fix their borrowing costs for two or five years. Moneyfacts data showed that the average two-year fixed mortgage rate rocketed to almost 7% in the summer of 2023 before cooling at around 5.5% currently.
“Households who choose a mortgage with a shorter fixed term are more exposed to risks affecting mortgage rates,” said Marcus Buckmann and Peter Eccles, authors of the 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 research showed that mortgages sold by intermediaries, such as brokers, rose from 57% in 2013 to 81% in 2020 for first-time buyers, partially due to tougher regulations requiring the involvement of a qualified adviser. In regions where broker intermediation rose by 10 percentage points, there was a 1.8-2 point rise in the share of mortgages with a short fixed term.
“Our results suggest that brokers encourage households to choose short fixed-term mortgages,” the authors said.
Mortgages are a key channel for monetary policy, forcing households to curtail spending. Higher rates also reduce demand in the economy by encouraging households to save more and affecting asset prices.
Still, a separate BOE study said flexibility in the mortgage market could have reduced the impact of rising rates. Some borrowers have been able to cushion the blow by extending their loan terms or by accessing equity in their property, particularly as house prices climbed.
