Growing broker intermediation in the mortgage market leads to more short-term mortgages, but it has also encouraged the use of smaller lenders.
A working paper from the Bank of England looking into the effect of growing intermediation in the mortgage market between 2013 and 2020 has found that brokers encourage borrowers to select short-term mortgages.
The report found that shorter-term fixed rate mortgages are “more exposed to risks affecting mortgage rates”, especially the future base rate.
A growth in the share of short-term fixed rates “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”.
It added that it also speeds up the “transmission of monetary policy”, so base rate rises will impact household finances more immediately.
There are also impacts on lender liquidity, as lenders rely on short-term funding to finance mortgages, which can create a “maturity mismatch between assets and liabilities”, but this becomes “less acute” with people selecting shorter-term fixed rates.
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Increased broker intermediation allows smaller lenders to diversify
The Bank of England added that the Mortgage Market Review had impacted lenders’ business models, especially those of 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 geographical diversity of their loan portfolios”.
“Increased access to customers also allows smaller lenders to specialise their mortgage books and compete more effectively against larger lenders on specific products and gain market share. In particular, it appears that smaller lenders specialise in mortgages with a long fixed term and high loan to value (LTV),” it explained.
The report stated that increased broker intermediation on smaller lender profitability “might be ambiguous”, as they can grow market share, but their margins may be squeezed due to increased competition.
The BoE said that increased geographical diversification through increased broker intermediation can “lead to increased lender resilience”, as it ensures smaller lenders are “less exposed to sharp drops in house prices” in regions that contain the most branches.
