Have you been pressured by a mortgage broker into a shorter deal and paid the price? Email: money@telegraph.co.uk.
Mortgage brokers left homeowners at the mercy of interest rate shocks by steering them to shorter deals so they could benefit from repeat business, analysts claim.
A bombshell working paper by Bank of England researchers has claimed that brokers encouraged borrowers to take out two-year fixed deals when rates were at record lows. Every time a homeowner needed to refinance, they would then rake in extra fees.
The practice may have left borrowers exposed to stark jumps in repayments when interest rates soared to almost 7pc in the summer of 2023, experts said.
Tougher regulations requiring financial advisers to oversee house purchases saw mortgages sold by intermediaries such as brokers rise from 57pc in 2013 to 81pc in 2020 for first-time buyers.
The last decade has also seen homeowners opt increasingly for fixed rates, which represented 97pc of the market in 2022 compared to 69pc in 2012, according to UK Finance Data.
Sarah Coles, personal finance expert of fund shop Hargreaves Lansdown, said British borrowers have always tended to fix for shorter terms – unlike those in the US.
She said: “This may be because longer-term fixes aren’t always portable in the UK, and given how expensive properties are, people are more likely to buy somewhere big enough for them at that time, and trade up when their circumstances change, rather than locking into a home for the long term from day one – which might be more common in countries where property is more affordable.”
The trade body said that in 2015, over half of new residential mortgages were two-year fixes, while five-year fixes accounted for 25pc of new deals.
Rock-bottom mortgage rates were the norm for most of the 2010s so fixing for two years was of little risk.
Rates dropped to historic lows in 2021 as a handful of banks launched sub-1pc deals and the average two-year fix dropped to roughly 2pc.
But a dramatic uptick in inflation – fuelled by Russia’s invasion of Ukraine – sparked a series of rises to the Bank of England’s Bank rate. This had a knock-on effect on mortgages, pushing rates to just below 7pc in 2023. Average rates are currently hovering above 5pc.
It means homeowners who locked in for cheap, short deals before the crisis saw hundreds of pounds added to their mortgage bills almost overnight.
Bank of England researchers, Marcus Buckmann and Peter Eccles, the authors of the paper, said brokers had nonetheless encouraged homebuyers to opt for shorter fixes despite warnings of inflation threatening a spike in rates.
They said: “Our results suggest that brokers encourage households to choose short fixed-term mortgages.
“Households who choose a mortgage with a shorter fixed term are more exposed to risks affecting mortgage rates.”
They also accused brokers of “steering households towards these mortgages to increase fees from repeat business.”
Unlike other types of financial adviser, brokers are allowed to earn commission, paid for by the lenders who sell the mortgages. Brokers get paid a fee for every loan they help lenders write. On an average residential mortgage of £250,000, a typical fee equates to £1,000 – 0.40pc of the total loan. This commission is paid by the bank or building society.
Furious brokers are preparing to contest the report’s findings, The Telegraph understands.
Robert Sinclair, of the Association of Mortgage Intermediaries, said: “We have some concerns with the structure of the work. I am worried about the Bank dropping 2013-2020 analysis, given the interest rate environment now.”
He added that “there could be any number of reasons why two-year fixes were more popular in that five-year period – their evidence fits one type of conclusion but without considering other possibilities”.
Lewis Shaw, of brokerage Riverside Mortgages, said: “There were undoubtedly some brokers that flogged two-year deals because they were going to make more money. Some of them told me that’s what they do.
“In 2021, there were a lot of two-year deals signed. People missed inflationary warning signs and as we know 2023 was the worst for interest rates.”
But Mr Shaw said borrowers would “need to take some personal responsibility”, for their exposure to interest rate shocks.
He said: “It’s very easy to blame brokers and lenders, as people did when the financial crisis happened. No one was ever marched into a branch with a gun to their head and told they must borrow at a two-year rate.”
In the past decade, the popularity of two-year mortgages has fallen to a third of new mortgages while the share of new deals fixed for five years has risen to just under half of all new mortgages.
But two-year fixes remain popular – although some who took out shorter fixes have since claimed to have been misled.
Law firms previously warned that disgruntled borrowers who were convinced to take out two-year fixes only to be hit with a shock rise in payments could mount a mass legal challenge.