Bank of England: Mortgage Brokers Made Rate Hikes More Painful
Research reveals how mortgage brokers pushed British homeowners into short-term deals
Mortgage Brokers, Bank of England, Interest Rates, UK, Homeowners
London: So, it turns out British homeowners really got the short end of the stick when it comes to rising interest rates. A recent study by the Bank of England found that mortgage brokers played a big role in this mess. They convinced folks to go for shorter-term deals, which left many scrambling when rates shot up.
During the 2010s, more people started using brokers for home loans, and guess what? They mostly opted for short-term fixed mortgages. The brokers were all about those extra fees every time someone had to refinance. This strategy backfired when interest rates climbed to tackle inflation in 2022-23, leaving many homeowners facing higher repayments.
Unlike in the US, where people can lock in mortgage rates for decades, British borrowers usually fix their rates for just two or five years. In the summer of 2023, the average two-year fixed mortgage rate soared to nearly 7% before settling around 5.5% now.
According to the study, choosing a shorter fixed term makes households more vulnerable to rate changes. The authors, Marcus Buckmann and Peter Eccles, pointed out that this also speeds up how quickly monetary policy affects household finances.
Interestingly, the research showed that the share of mortgages sold by brokers jumped from 57% in 2013 to 81% in 2020 for first-time buyers. This was partly due to stricter regulations that required a qualified adviser. In areas where broker use increased, there was a noticeable rise in short-term mortgages.
In a nutshell, brokers seem to be nudging people toward these short fixed-term mortgages. And with mortgages being a key part of monetary policy, higher rates can really squeeze household budgets, pushing people to cut back on spending.
On a brighter note, another study from the Bank of England suggested that some flexibility in the mortgage market might have helped ease the pain of rising rates. Some borrowers managed to extend their loan terms or tap into their home equity, especially as house prices went up.
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