As part of the mortgages market study, the FCA wanted to understand whether consumers’ borrowing costs vary materially depending on their choice of intermediary and, if so, why.
We know that a consumer’s cost of borrowing can differ as a result of product, property and borrower characteristics, including credit risk. To isolate the impact of the choice of intermediary, we use a novel transactional-level dataset to build a model for mortgage pricing to compare similar products for like-for-like consumers.
We find that the average cost of borrowing varies materially across intermediaries. Looking at the cost of 2-year fixed rate mortgages sold by different intermediaries to like-for-like consumers, we find a 27 basis points difference in the average borrowing cost. This amounts to about an £800 difference calculated on the median loan size over the introductory period.
In investigating why the cost of borrowing varies across intermediaries we consider two potential drivers. The first is the commission lenders pay to intermediaries (‘procuration fees’). The second is the number of lenders each intermediary used to place business.
We find that:
- current levels of commission do not appear to be linked with customers paying more for a mortgage
- intermediaries that place business with a larger number of lenders sell on average cheaper products, while those that use fewer lenders sell on average more expensive products
Adiya Belgibayeva and Tommaso Majer
Adiya Belgibayeva and Tommaso Majer work in the Competition & Economics Division of the Financial Conduct Authority. Adiya Belgibayeva is also at Birkbeck College, University of London.
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