Mortgages are static in a changing market
The mortgage industry is arguably the driving force of the United Kingdom’s financial retail industry, yet it has remained unchanged for decades, is full of anachronisms and is no longer aligned with customer preferences. It’s offline, relies on face-to-face meetings which take weeks to organise, requires piles of paperwork, and at the end of it all, customers have little confidence that they’ve got the best deal for their needs.
Mortgages account for 87% of lending balances for the major banks. In monetary terms, the industry is valued at £1 trillion. Yet despite its remarkable size and importance, it operates with practices which are decades old and which aren’t aligned with the preferences of today’s consumers. As a result, many consumers have no idea of the best way approach securing a mortgage or how to get the best mortgage deal possible, as revealed in the Financial Conduct Authority’s (FCA) Mortgage Market Survey.
Getting a mortgage should be a simple process: you go to a lender, get a quote, get the loan and repay in affordable monthly installments. But sadly, this is not the case. People in search of new homes have to contend with decades-old practices causing long delays in fixing appointments, mountains of paperwork, and at the end of that they can have little confidence that they have secured the best mortgage for them. Why is that?
The simple (and possibly cynical) reason is that mortgage lenders prefer it that way. There are literally thousands of different products for customers to choose from — including fixed-rate, variable rate, standard-variable rate, discount, tracker rate and others — just to get a mortgage.
Even among these options, different interest rates exist depending on the deposit, your eligibility and other factors (from the same lender, let alone others). In other words, unless you’re financially literate, your chances of understanding what you are being offered or getting a favourable deal are slim to none. It’s no wonder that in order to get a good mortgage, customers have to get a good broker. But sadly, even these are hard to find.
Brokers don’t meet customer expectations
The role of the broker is to get the best deal for the customer, but this is very difficult to do. More often than not, a mortgage broker’s hands are tied by lenders. The information made available to mortgage brokers, and even mortgage comparison websites, is only a fraction of what the banks have on offer, which makes it impossible for brokers to get the best deal for their clients.
Brokers don’t come cheap, either. Their steep fees are in place to help you pay less on the mortgage you’re hoping to get — but if you can’t be guaranteed that you’ll get your perfect mortgage deal, you might as well be throwing your money to the wind. What’s more, lenders go to great lengths to disguise their total costs on price comparison websites and mortgage sourcing systems, which means brokers don’t actually have all the information they need to ensure you’re getting the best mortgage deal out there. So unlike stockbrokers, for example, who would have all the necessary information available at their fingertips, mortgage brokers have to carry out extensive research to get what may be the best deal for a client. And that simply won’t do. Customers deserve better from lenders and brokers.
Borrowers left in the dark
With hundreds and sometimes thousands of products to choose from, borrowers often feel left in the dark. Many believe the hardest part of the home-buying journey is over when they find their dream home. Sadly, that’s rarely the case. After finding your home, the next step is to start looking for a mortgage. That’s when you might realise that you can’t afford it — or rather, that you can’t afford the product being sold to you.
According to the FCA, few borrowers switch mortgages after the introductory offer has ended, and so end up on much higher rates than they could be if they switched to a new deal. To make matters worse, 30% of customers could have secured a better deal on their initial mortgage and so saved around £550 a year. Of course, the issue isn’t that borrowers don’t want better deals, but that the complexity of the process makes it difficult for them to identify mortgage deals that could save thousands of pounds off their total repayment.
The question, then, is how borrowers can get the best deal if it’s so difficult to get the information they need.
Change is on the Horizon
It should come as no surprise that the impact of the digital revolution will be felt even in the mortgage industry.
To begin with, the FCA is pushing lenders to make it easier for borrowers to change to more favourable mortgages. Their plan is an effort to free mortgage prisoners (who are unable to switch from their current mortgage even though they would benefit to do so) by working with banks to change how they communicate. This is part of its ‘fairness’ mandate, that should see banks act more consciously to match borrowers to the right products, even if it means less income for them.
These changes are aimed at correcting the current imbalance in the industry. For instance, it’s become a lot harder for young professionals to own homes given the drastic change in house prices, compared to the modest increase in real income over time. In 1997, 55% of 25 to 34-year-olds were homeowners. Twenty years later, that number is down to 35%. The reason for this deficit? House prices across England have increased by 173%, excluding London (which is up 253%), while real income is up by only 19% for the age bracket. In addition, saving the 10% deposit needed to get a mortgage is a lot harder now. To top it all off, the mortgage industry is increasingly strict when it comes to assessing eligibility for their loans.
But, with changing policies that will make more houses available on the market, lower house prices due to Brexit, and improved lending settings, things might finally be looking up.
Customers take control
There are more homebuyers now depending on gifts and loans from family and friends than ever before. In response to this, and other changes in the market, lenders approved 11.5% more loans in January than they did in December.
As more information becomes available online — and thanks in no small part to advancements in blockchain and Artificial Intelligence — it will become easier for customers to have better oversight of their mortgage options, and to calculate precisely how much they will be paying back, when to switch to a better deal, and how to get the best from brokers.
Innovation is arriving in the mortgage market
No system is impervious to change. The leaps experienced in other industries will happen in the mortgage industry as well. Given the massive displeasure with the status quo, the UK mortgage industry has garnered a lot of interest from FinTech startups looking to right these wrongs. These are welcome advancements that should make it seamless for borrowers to get credit. By using robo-advisers who leverage AI, Open Banking and other advancements, customers can increasingly get the advice they need, contact the best mortgage lender for their needs and get the deal approved quickly, from the comfort of their own homes.
Making this a reality isn’t just a matter of technological advancement: many banks are still hesitant to reveal the full details of their products to third-party sites. Lenders know customers are drawn to products with low fees and low interest rates, even though in the long run they might be more expensive. By revealing this to a mortgage selection site, banks may be less likely to get new customers. However, a robo-adviser can rather analyse all the information over the full term and then recommend the best mortgage deal for customers. This would be fair and unbiased advice, free from tampering or collusion — just the type of change the industry has been waiting for. It could lead to a new era where customers trust mortgage advisers and banks completely.
It’s time to embrace change in the mortgage market
A lot of time can be saved — and deals made — if the mortgage market fully embraces technological advancement. Granted, some of these changes are easier in theory, but given a chance, the results would be just as revolutionary as they have been in other industries.
Soon, picking out a mortgage will be just as easy as picking out a new outfit from an online store. Or at least, that is what we hope.