Effects of the Advice Requirement and Intermediation in the UK Mortgage Market

Abstract

We exploit a change in conduct regulation – the Mortgage Market Review (MMR) in 2014 – to estimate the effects of mandatory advice on the choices of UK mortgage borrowers. Focussing on the most affected segment of borrowers, home purchasers, we find that the proportion of advised transactions increased from three quarters to nearly the entire market post MMR. To estimate the effect on various aspects of consumer choices, we first construct a unique dataset that combines the entire population of residential mortgage originations from mid-2012 to mid-2016 with credit reference agency data and detailed product data on mortgage contracts (including all fees – an important component of costs given frequent re-mortgaging in the UK market). Our observation window straddles the MMR implementation date and our main specifications include an implementation window to reflect the transition in the market. We use difference-in-difference matching on the repeated cross-section to estimate the counterfactual outcome for mortgage borrowers that did not use mortgage advice before the MMR, but were effectively forced to do so afterwards. We find that advice made these borrowers more likely to fix their rates for short periods, choose longer mortgage terms and use an intermediary. We find no effects of mandatory advice on various metrics of borrowing cost. Since we observe a notable increase in intermediation across the market following the MMR, we also use matching on the cross-section of post-MMR originations to estimate the average treatment effect of intermediation. We find that intermediated borrowers are more likely to fix their rates for short periods, choose longer mortgage terms and have a lower cost of borrowing than consumers who go direct to lender.