Anyone involved in the residential mortgage lending world will be acutely aware of the massive increase in mortgages being arranged on a fixed rate basis. In fact, recent analysis of the Mortgage Lending and Administration Return [‘MLAR’] shows that in the last quarter of 2024 more than 94% of residential mortgages were arranged on a fixed rate basis. While that percentage is slightly down on the peak in quarter 3 2022, of 95.5%, it is way above the percentages in 2012 which were in the 20% – 30% range.
Ask any mortgage intermediary why fixed rates are so popular and they will list many reasons including (but not limited to):
- Budgeting Certainty: Fixed-rate mortgages lock in an interest rate for the fixed period, ensuring consistent monthly payments making it easier for borrowers to plan their finances without worrying about fluctuating rates.
- Protection Against Rate Rises: While most current predictions are against imminent rising interest rates, fixed rate mortgages shield borrowers from higher payments, providing peace of mind and financial security.
- Long-Term Planning: Homebuyers who plan to stay in their homes for many years benefit from the stability of fixed payments, avoiding the risk of future rate increases.
- Simpler Financial Management: With predictable payments, borrowers can allocate funds more effectively for other expenses, savings, or investments.
- Reduced Stress: Fixed-rate mortgages eliminate the uncertainty of variable-rate loans, reducing financial anxiety and allowing homeowners to focus on other priorities.
So there you have it, that’s why fixed rate sales percentages are so high. But not if you have read the Bank of England staff working paper number 1,104 titled “The effect of mortgage brokers on bank business models”, and accept the findings! In their abstract, the authors state, “Our findings indicate that this rise [households choosing mortgages with short fixed term mortgages] is due to brokers steering households toward these mortgages to increase fees from repeat business.”
What is clear is that firms need to protect themselves by undertaking effective files reviews
Can that really be the case? I speak with chief risk officers, compliance managers and brokers in many firms. They are usually enthusiastic about doing the right thing for consumers, that’s how they get repeat business, even without the requirements placed on them, for example:
- MCOB 4.4A.5 (1) “a regulated mortgage contract will not be suitable for a customer unless the regulated mortgage contract is appropriate to the needs and circumstances of the customer” or
- MCOB 4.7A.6 (4) “whether it is appropriate for the customer to have stability in the amount of required payments, especially having regard to the impact on the customer of significant interest rate changes in the future;”
So, who is right? I can’t tell; I just don’t have enough case by case information. The only way to fully understand if the advice was ‘steered’, for ulterior motives, or led by genuine ‘needs and circumstances’ is for firms to undertake robust critical analysis of a meaningful sample of written business. What is clear is that firms need to protect themselves by undertaking effective files reviews. In addition to minimising the risk of cases going to FOS or litigation firms also benefit from enhanced credibility and trust among customers, the maintenance of high standards and consistency across the business and significantly improved risk management. And of course, firms also protect themselves from regulator criticism, like that in the Bank of England staff working paper.
