In the final report of its Mortgages Market Study, the FCA said that about 30 per cent of consumers missed out on cheaper mortgages that were just as suitable.
It cited broker incentives, along with poor innovation, restricted distribution channels and a lack of clarity from lenders as to why consumers were paying more.
There are “strong financial incentives on an intermediary to quickly find a client a mortgage. But, the incentives to search extensively and find the cheapest suitable mortgage are weaker,” it argued.
The FCA added that choosing a mortgage can be challenging as there are a large number of products but the tools and information currently available for borrowers to navigate the choices were limited.
However, it is not planning on making any intervention to remedy the situation, but is hoping the market will come up with solutions itself.
Generate a proc fee quickly
Regarding broker incentives, the regulator said: “There are strong incentives on an intermediary to find a customer a mortgage, and to do so as quickly as possible, to generate a procuration fee.
“And this is in line with a typical consumer’s needs. However, the incentives on an intermediary to search extensively for the best value mortgage are weaker.
“This is reflected in intermediaries’ panel strategies. These typically seek to cover a broad range of consumer circumstances, for example self-employed, poor credit history, etc. rather than a range of lenders for a specific customer, which could result in finding a cheaper mortgage.”
Lack of criteria clarity
The regulator found that a lack of clarity around criteria meant consumers were often overpaying for terms which were not applicable to them.
Between 25 and 30 per cent of consumers paid for mortgages with a higher age limit or maximum LTV than they needed, while a larger proportion of borrowers left buffers for other criteria, such as maximum loan-to-income (LTI) and credit score, the regulator said.
It noted that lenders typically charged higher prices to riskier consumers to cover the higher expected costs of lending to them, so mortgages with less demanding eligibility criteria tended to be more expensive.
However, it argued that to keep borrowing costs down, a consumer should buy a mortgage for which they just meet the eligibility criteria, otherwise they were likely to pay a premium for unused buffers they have in one or more of the eligibility criteria.
Shopping around helps
The FCA said that these findings indicated that improving the ability of consumers and intermediaries to shop around on products, in particular by making it clearer for which products a consumer is likely to qualify, should help consumers find a better deal.
“We recognise that the market has changed in some ways, for example retention procuration fees paid by lenders to intermediaries are more prevalent,” the FCA said.
“While this may have a positive effect on switching levels, we do not believe it likely to be any easier for consumers to identify the best value mortgage. We believe it likely that consumers continue to miss potential savings.”
Lenders’ choice of distribution channel
However the regulator did praise brokers for finding better outcomes given their restricted panels of lenders.
The regulator highlighted that not all lenders distribute mortgages through all intermediaries, narrowing the range of products available through intermediaries.
“When considering only products available through an intermediary, we found that fewer consumers missed out on significant savings – only around 20 per cent.
“This may be a better measure of the effectiveness of intermediaries in finding a consumer the best mortgage among those available to them.
“But it is not necessarily a better measure of how the current market delivers the best outcomes for consumers.”
The FCA also said that there should be little incentive for lenders with unmet capacity to lend to restrict the availability of their mortgages. All lenders have distribution strategies comprising some or all of sales in branch, by telephone, via intermediaries.
Indeed, for new lenders, distributing mortgages through an intermediary network can be the most cost-effective way of reaching the widest customer base.
“New tools should also incentivise lenders selling direct to improve the information they make available. At present, consumers who go direct to a lender are often reliant on limited eligibility and affordability information provided online.
“Innovative new tools that have the potential to achieve this have begun to emerge. But they are still developing.
“To succeed, they require far greater traction with lenders, which has not yet happened. We want to work with lenders to enable this,” the FCA concluded.