Mortgage brokers are seeing a boom as more homebuyers turn to them for help navigating stricter lending rules, figures suggest.
However, the same figures show that buyers are increasingly paying more in fees and charges.
Brokers saw revenues leap by 23 per cent between 2016 and 2017, despite the number of house sales actually falling during this period.
The total reported revenue earned from the mediation of regulated mortgages last year was £1.08 billion, the latest data from the City watchdog reveals.
Mortgage brokers saw revenues leap by 23 per cent between 2016 and 2017
The lion’s share of this was earned by mortgage broking firms, with a smaller portion earned by consumer credit firms.
This continues an upward trend that has been ongoing over the past five years – like for like revenue has nearly doubled between 2013 and 2017.
The FCA says this is likely a result of both general growth in the mortgage market and an increase in business being transacted via brokers.
But the latest data from HMRC shows there has been no corresponding uptick in the number of residential property sales. In fact, sales fell by nearly 15,000 over the 2016/17 period, from 1,235,020 in 2016 to 1,220,060 last year.
As much as 76 per cent of brokers’ earnings from mortgage mediation was made up of commission, down from 79 per cent in 2016. Conversely, the amount that brokers earned through fees and charges grew from 20 per cent to 23 per cent.
Andrew Montlake, director at broker Coreco, said: ‘Estimates show that over 70 per cent of mortgages are now arranged through brokers and coupled with the introduction of procuration fees for Product Transfers – switching from one product to another with the same lender – this has helped to increase overall broker revenue.
‘Although house sales may have dipped over the period, the value of mortgages arranged for many brokers has increased as house prices themselves remain high.’
David Hollingworth, mortgage expert at L&C Mortgages, which is This is Money’s mortgage broker partner, believes that the tightening of lending criteria in the wake of the financial crisis and the tougher rules implemented by a recent review of the market by the regulator, known as the Mortgage Market Review, are increasingly pushing borrowers towards brokers.
‘All in all the reasons to use a broker have only become more compelling,’ he said. ‘Of course it’s still important that borrowers understand what their broker will offer and how they work.
From all activities, mortgage brokers reported earnings of £1.2 billion over the 2016/17 period
‘For example, some brokers will only work from a limited panel of lenders rather than from across the market, which could limit the range of choice of deals.’
The majority of brokers also earn part of their revenue from insurance mediation, typically selling life insurance and income protection products. This accounted for £410 million of total mortgage broker revenue last year, with mortgage broking itself accounting for £767 million.
From all activities, mortgage brokers reported earnings of £1.2 billion over the 2016/17 period.
Should I use a broker or should I go direct?
Some mortgage brokers charge upfront fees to the homebuyer in addition to taking commission from the lender, whereas others take commission but are fee-free for customers, such as This is Money’s partner London & Country.
Typically fees come to around £400 per client, but depending on the size of the loan and whether it is a residential home loan or a buy-to-let, fees could be as much as one per cent of the full mortgage balance.
On a £150,000 mortgage, such a percentage fee would mean paying £1,500 for the work done by your adviser who could also earn commission from the lender for arranging the deal.
Commissions are usually between 0.35 per cent and 0.45 per cent on the loan, so in this example the broker would also earn between £525 and £675 in commission paid by the lender.
Going direct to the bank will not carry any of these fees – but you may end up getting a worse deal as a result.
James Daley, of consumer rights group Fairer Finance, said: ‘Using a broker tends to make sense, especially if you’re taking out a mortgage for the first time.
‘Mortgages have become ever more complex over the past few years, with a litany of fees and charges which can obscure the real cost of the deal. Brokers are also invaluable if you are self-employed or have special circumstances.
‘But brokers can be expensive. Many “double dip” – taking both commission from providers and large fees from customers. So it’s important to find a broker that is reasonably priced.
‘Some don’t charge consumers anything, but they may not search the whole market. Some promise to search every deal – but charge a hefty fee for the privilege.’
Why is there a controversy over commissions?
The role of both fees and commission in brokers’ earnings has been the subject of repeated scrutiny from the financial watchdog in recent years.
In 2012, investment advisers were banned from receiving commission from fund managers for recommending their products after the regulator found that high commissions were biasing advisers into making inappropriate investments for their clients.
However, at the same time it concluded that the same issue was not present in the mortgage market.
But the issue hasn’t gone away and in December 2016 the Financial Conduct Authority confirmed plans to investigate whether or not these commissions cause bias and should be banned.
However, the watchdog stated in an interim report that it had found little evidence that broker commission leads to poor consumer outcomes.
The final findings of this study are set to be published later this year.