2018年-FCA英国金融行为监管局_occasional_paper_33_57页_1mb

Summary of "Choices of dominated mortgage products by UK consumers"

Core Content

This paper investigates the prevalence of dominated mortgage choices among UK consumers and the cost implications of such decisions. It leverages a unique combination of lending transaction reports, detailed product information, and credit files from nearly 700,000 households who took out mortgages between January 2015 and July 2016. The study introduces a new methodology called dominance analysis, which identifies mortgage products that are strictly more expensive than alternatives with identical non-cost features (e.g., fixed rate duration).

The paper highlights that nearly one in three (29.9%) UK consumers in 2015/16 made mortgage choices that were dominated in cost, resulting in an average annual excess cost of £550. This represents 12.7% of their annual mortgage costs. A subset of these (over 17%) incurred strongly dominated choices, defined as excess costs above £250 or 5% of total annual mortgage costs.

Main Findings

• Demographic variation: Consumers with lower financial capability (e.g., low income, old age, poor credit history) are more likely to choose dominated products.
• Borrower types:
  • Remortgagers had the lowest rate of strongly dominated choices (13.5%).
  • First-time buyers (18.5%) and home movers (21.3%) had higher rates.
• Eligibility criteria:
  • Dominating products often have equal or more lenient eligibility requirements (e.g., age, loan amount, LTV).
  • However, they may be more restrictive on less observable criteria, such as credit scores and LTI ratios.
• Search behavior:
  • Consumers tend to favor familiar lenders (e.g., those with whom they already have a financial relationship).
  • Intermediaries typically use a small set of regular lenders, which may lead to overlooking cheaper alternatives.
  • Non-intermediated transactions also show a strong preference for familiar lenders, even though they account for less than 20% of eligible products.

Methodology

The dominance analysis approach involves:

• Identifying dominated products by checking if a borrower was eligible for a cheaper alternative with the same non-cost features.
• Ensuring that dominated products are not unsuitable due to borrower-specific constraints (e.g., inability to pay upfront fees).
• Using detailed data on borrower demographics, property characteristics, and product features to construct choice sets and assess eligibility.

This method is more robust than traditional cost comparison metrics like APR, as it accounts for consumer preferences and product suitability without assuming specific preferences.

Robustness and Limitations

• The dominated choice rate of 29.9% is relatively consistent even among prime borrowers (high income, low LTV, no complicating factors).
• The methodology cannot account for unobservable lending criteria that might restrict access to cheaper products.
• Intermediary behavior may contribute to dominated choices, but the relationship requires further research.
• The paper emphasizes that policy implications should be considered in the broader context of the FCA Mortgages Market Study (2018).

Policy and Market Context

• Mortgage advice is common (over 97% of borrowers received it), but it is not necessarily independent or comparative.
• Independent intermediaries are often used, and they can search across multiple lenders.
• Product heterogeneity is significant, with variations in features like repayment flexibility and early redemption charges.

Conclusion

The study reveals that many UK consumers are not effectively searching for the best mortgage deals, often choosing dominated products due to demographic factors, complex housing transactions, and familiarity bias. These findings suggest that improving consumer search behavior and increasing access to better information could lead to more cost-effective mortgage choices.

Key Points

• 29.9% of UK mortgage choices in 2015/16 were dominated in cost.
• £550 per year average excess cost for dominated choices.
• Demographic and situational factors (e.g., low income, age, credit history) increase the likelihood of choosing dominated products.
• Familiarity with lenders influences decision-making, even when they are not the cheapest options.
• Intermediary behavior and product eligibility criteria may contribute to dominated choices.
• The dominance analysis method is robust but has limitations due to unobservable factors.

References

• Data Sources: FCA Product Sales Data, Moneyfacts, Credit Bureau Data, HM Land Registry, 2011 UK Census.
• Sample Size: ~695,000 mortgage transactions.
• Methodology: Retrospective price comparison using eligibility and product feature data.
• Limitations: Unreported lending criteria and consumer preferences not fully captured.