Mortgages  

Impact of FCA's Mortgage Market Review revealed

Impact of FCA's Mortgage Market Review revealed

The Mortgage Market Review has made borrowers more likely to take out two-year fixed-rate deals, according to research by the Financial Conduct Authority.

As part of research the regulator carried out for its Mortgage Market Study, the FCA found speaking to an intermediary increased the likelihood of choosing a two-year fixed rate home loan by 14 percentage points and decreased the likelihood of choosing a five-year fixed rate deal by 8 percentage points.

The Mortgage Market Review introduced an advice requirement which meant regulated mortgage advice should be provided with every "interactive" mortgage sale, whether conducted by a lender directly or an intermediary.

Following this change, the proportion of advised mortgage transactions increased from around 75 per cent before MMR to more than 98 per cent in the post-MMR market.

The FCA found that since MMR, the proportion of fixed rate mortgages being recommended by brokers has increased from 88 per cent to 94 per cent.

Meanwhile 57 per cent of mortgages arranged by a broker are two-year fixes, compared to 48 per cent before MMR.

The paper said: "Although the trend towards shorter-term fixed rate products is already apparent from the aggregate data, our findings suggest that the advice requirement and increased intermediation are partly responsible for this trend.

"It is worth reflecting on whether advisers' increased inclination to recommend two-year fixed rates is a feature of the current low-interest rate environment, or whether institutional factors are also at play here.

"Shorter term fixing periods mean that remortgaging risk in the UK is now largely a short-term question: an increase in interest rates would affect the majority of first-time buyers and home movers within two years.

"If rates were to rise, these consumers may have to adjust their consumption sooner than would have previously been the case."

The research also found that advice tended to lead consumers to buy mortgages with longer terms, with the average mortgage term since MMR up by 20 months compared to before the regime was introduced.

The paper speculated that since longer mortgage contracts mean lower monthly payments, this may be driven by intermediaries' cautious interpretation of affordability requirements.

David Hollingworth, associate director at broker L&C, said: "Product suitability will always vary, whether it be from the individual's perspective or depending on the prevailing market conditions and pricing.

"Two-year fixed-rates have been consistently popular and can offer borrowers not only an initially cheaper rate but also the flexibility to review their options after two years rather than to lock-in for a longer period. 

"In a benign interest rate environment those borrowers will be attracted by the lower rates on offer for shorter term fixed deals.

"However, we have seen five-year fixed rates rising in popularity as the margins between five-year fixes and shorter term deals have narrowed and the likelihood of future rate rises has grown. 

"Ultimately it should come down to the individual and their attitude to the risk that higher interest rates could pose."