Borrowers who take out a mortgage using a broker are more likely to remortgage when their fixed period ends, and more likely to remortgage away to another lender.
The research found borrowers who remortgaged internally saved around £2,324 per year from the reversion rate and those who remortgaged externally saved £2,620 per year.
The study found that 73 per cent of borrowers remortgaged before there was an increase in mortgage payments, with 56 per cent doing so before the initial period ends.
However, the difference in outcomes between those who used a broker and those who went direct was stark.
Brokers save borrowers money
When loans are intermediated initially, borrowers are more likely to remortgage with a different lender, potentially gaining greater savings than staying put, and will use a broker to do so.
They are also less likely to end up on the much higher lender reversion rate.
Among those who took an original loan directly with a lender, only 10 per cent remortgaged externally and 49 per cent remortgaged internally, while 26 per cent ended up on the reversion rate.
In contrast, of those who used a broker first time around, 24 per cent remortgage externally, 46 per cent internally and just 17 per cent landed on the reversion rate.
The difference in reversion rate outcomes becomes even larger if borrowers who repaid the loan are excluded, with 31 per cent of direct customers hitting the higher rate compared to 19 per cent who used a broker.
However, the researchers suggested in this instance the differences could be due to borrower selection at origination, and not the result of brokers’ actions.
The study also highlighted the importance of brokers by comparing borrowers whose broker became inactive during the course of the loan, and found these borrowers were much more likely to not remortgage.
“This provides evidence of the importance of brokers in reducing the nonpecuniary costs from taking action that households face,” the authors noted.
Year on reversion rates
The occasional paper number 54, When discounted rates end: The cost of taking action in the mortgage market was commissioned as part of the FCA’s compliance with the Competition and Markets Authority (CMA) investigation into the cost of mortgage loyalty.
The researchers followed the cohort of all UK borrowers who bought a property with a two- year fixed mortgage between July 2013 and June 2014 until December 2016.
Overall, around one in five borrowers remained on the reversion rate after the initial period expired, and the researchers found that roughly half of them had done so for more than 12 months.
Thus, they noted, there is a significant proportion of those who end up on the reversion rate and many of whom are there for a long period of time.
Extracting equity was seen as a key reason to switch lenders, with 39 per cent of external remortgagors and only 18 per cent of internal remortgagors doing so.
This suggested that, “once a borrower is set on extracting equity, the relative benefits of searching for a new lender are greater,” the authors noted.