Bank of England thinks mortgage borrowers prefer low commission rates

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The Bank of England has published a study according to which borrowers “may pay more attention to interest rates than commissions when choosing a mortgage.”

In a 60-page staff working paper, the UK’s central bank said borrowers appear to be slightly more sensitive to interest rates than loan origination fees, especially younger households with lower incomes.

“In general, the parameters of demand suggest that borrowers can shop from different lenders and products at low interest rates, paying less attention to commissions for issuing loans,” concluded the bank.

Mortgage lenders are cutting interest rates to an all-time low. Literally last month Nationwide became the first lender in UK history to offer rates below 1%. on a mortgage with a fixed interest rate for a period of five years. Two weeks later, Halifax has cut rates

Bank of England data show that the gap between mortgage lenders’ interest rates and their fees began to widen markedly after the introduction of the Loan Financing Scheme (FLS).

Introduced in 2012, the scheme was designed to provide funds to lenders at lower rates and to stimulate lending to households. The central bank said it has increased lending to the UK by more than 30 percent.

It also meant that lenders lowered interest rates but raised clearance fees. Bank of England data showed that a higher £ 1,000 creation fee corresponds to a 27 basis point lower interest rate.

Conversely, a zero-commission product is usually offered at an interest rate that is, on average, 33 basis points higher than a product of the same type with a commission.

Prior to FLS, the bank stated that these fees were “reasonably stable” but subsequently increased by about £ 100.

The document also emphasizes that fixed-rate mortgages for a relatively short period (for example, two years) “encourages borrowers to re-mortgage frequently and, as a result, generate large commission income for lenders.”

The Bank of England simulated a scenario in which it prohibited lenders from charging any clearance fees.

“In such a counterfactual scenario with zero disbursement fees, lenders charge higher interest rates to compensate for the drop in profits due to the fee ban.

“Naturally, lenders’ profits are declining, but consumer surplus is also decreasing, indicating that they are benefiting from this market segmentation and price discrimination is increasing the surplus.”

He concluded that “although the clearance fee allows the lender[s] price discrimination and surplus “, a complete ban on fees” will reduce borrower’s surplus and overall welfare. “

ruby.hinchliffe@ft.com

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