UK MORTGAGE AND PROPERTY REPORT

May 2019

Welcome to the May 2019 edition of the Mortgage and Property Report. In this issue, we look at the historic lack of technological innovation in the mortgage industry and the reasons behind this. We also look at how this has started to change in recent years, with a special focus on digitisation of the customer and broker journeys, the automation of key processes and the impact we expect this to have on the future of the industry. 

Key Highlights

• The mortgage market has lagged behind most other financial (and other) sectors in digitisation and innovation, but this is starting to change
• Customers are managing more aspects of their lives online and becoming increasingly comfortable using digital channels to search for and purchase complex products such as mortgages
• Innovative technologies and digital processes are becoming available across all aspects of the mortgage value chain, from sourcing, to application, through to completion

Introduction

Consumer behaviour has changed dramatically over the last two decades, with many purchases that historically were carried out in traditional brick and mortar stores or offices with the help of a retailer or advisor now being carried out independently by customers online. This change in behaviour has been observed in many sectors, including general retail, travel and accommodation booking, and a number of financial services including online banking and insurance. Mortgages have until very recently been a notable exception to this trend, with many customers still going to see their lender or broker face to face, and physical paperwork continuing to play a very important role in the origination process. We have started to see changes to this in the last couple of years, although innovation has been comparatively slow to catch on, and held back by an overarching lack of standardisation across the industry. In this issue, we look at why this is the case, what kind of solutions are being built to change this, as well as what this means for the various stakeholders across the mortgage value chain.

Why is the mortgage industry so far behind in technological developments vs other industries?

There is no denying that the mortgage industry lags behind other sectors in moving into the digital world. There are several reasons for this. For one, the size (for many, it is the largest financial commitment they will ever make) and longevity of mortgage products means customers are generally more cautious buying these independently than they are with simpler financial products, e.g. travel insurance or a credit card. The complexity of the application process and usual need for follow-up questions or further documentation also means they are more challenging for lenders to easily offer online. This is exacerbated by the lack of standardisation in the industry which makes a product that is already complex more complex and difficult for customers to evaluate. Different lenders ask different questions (or worse, the same question in a different way) to establish eligibility, require different types evidence and documentation, present their products in different ways, and use different jargon, making comparison a mammoth task.

This in part explains why the vast majority of borrowers go through a broker. Direct sales represent less than 30% of all new lending, and very few of these are online. Although the total number of mortgages sold via a direct online channel has increased slightly, from c. 1,000 a month 4 years ago to c. 3,000 a month in the last year, this still accounts for only 3% of total mortgage sales, and less than 10% of all direct sales. Notably, around 60% of those direct online sales are to customers who are remortgaging, which means the process is simpler and they already have some familiarity with mortgage products. 20% are to home movers, which is slightly more complex but still means they likely have had a mortgage before, while only 20% are to first time buyers.

The Emergence of Aggregators and Online Brokers

Nonetheless, there is a growing desire amongst consumers, especially younger ones, to be able to purchase mortgage products online, without the need for face to face meetings, piles of paper work, or long waiting periods for an offer. To fill this gap, a wave of aggregators and online brokers have emerged over the course of the last few years. One example of this is price comparison websites’ move into the mortgage space, although their reach to date is still fairly limited as the lack of industry standardisation means it has historically been difficult for them to provide a comprehensive comparison of products that goes beyond just headline rates. Several aggregators have partnered with tech companies such as Podium and HD Decisions, who build more sophisticated comparison tools by working with lenders directly and taking into account external data such as credit scores to present customers with product choices that are more personalised to their particular circumstances and for which they are genuinely likely to be eligible.

However, aggregators only take customers as far as knowing what products may be available to them – after this stage they are generally still directed to a broker. One of the more significant changes for customers in recent years has been the emergence of online brokers – the likes of Habito, MortageGym, Mojo, and Trussle who have created clear online platforms that allow customers to interact with brokers online, efficiently and at their convenience. Some partner with aggregators, taking leads once a customer has found a product, while others offer the full journey themselves starting with sourcing. They are sometimes inaccurately described as robo-advisors – despite having slick digital front ends, in reality most have little in the way of automation or AI in their search or origination processes, and most interactions still involve humans. Nonetheless, they have succeeded in improving the customer experience by bringing it online - with more than 70% of borrowers using a broker, the advice process is an important component of the mortgage sales process. Most of these companies are still very young, having launched in the last 2-3 years, and are continuing to develop their proposition, level of integration with other players in the industry, and automation in their processes.

Innovation and the rise of APIs

The key to genuinely improving the speed and efficiency of the application and underwriting stages for all parties is to pull in as much information as is available on the customer and their circumstances from appropriate and trusted external data sources. This means customers only need to provide the basic details (and consent) to be identifiable, and lenders receive data they can trust in a standardised format. More and more companies have realised the value this provides, and are building APIs to make this integration easy. Significant inroads have already been made for data around ID verification and property valuation, as well as integration between sourcing systems such as 27tec and brokers (to allow for easy pre-population of customer details).

An important development which has the potential of being a game-changer for customers, lenders, and brokers alike is Open Banking (OB). OB allows customers to see all their accounts (even if they are with different banks) in one place, and provides a secure way to share transaction level data with third parties. As of January 2018, the UK’s largest nine banks and building societies must make their customers’ data available to them in this way, and many smaller banks are doing the same. It gives customers and the third parties they share their data with a clear view of their finances, and makes it easy for companies like mortgage lenders to determine what a customer’s affordability is and, as a result, what products are available to them.

The use of OB is not yet widespread, but new fintech companies who provide the categorization services to make the data easily digestible are continually entering the market. While some critics have complained that the technology has been slow to catch on and expressed concerns about customers’ willingness to share their information in this way, data suggests adoption may just be a matter of time. Online banking similarly had a slow start – a decade ago only 30% of UK adults used the internet for banking, but in 2018 this has increased to c. 70%. Of the population aged 25-44 (key age for mortgage customers) that number stands at 80%. In August 2018, 8 months into the launch of OB, only 4.2 million calls were made to banks’ OB APIs – by March 2019 this number has increased to 38.2 million.

Significant changes have also been made in the area of ID verification. The need for physical copies of ID documents and signing of paper documentation is being replaced by apps with facial recognition and DocuSign technology.

Another important process which is becoming more digital is the provision of property data, which after borrower information is the most important factor in lender’s decisions to offer a mortgage. In addition to traditional providers such as Rightmove and Hometrack, new companies are emerging that offer an additional level of information – from title information, to local area details, through to EPC details, all through API. The use of automated valuation models (rather than a physical valuation) is also gaining pace.

What this means for brokers and lenders 

While some of these processes and innovations are not yet fully formed, there is no question that lenders and brokers alike will need to be receptive to these changes, and embrace innovation in order to attract and retain customers. Competition going forward will be just as much on customer experience as it is on price, and established players will need to keep pace with new entrants who can more nimbly adopt new technologies. There is also likely to be a change in some of the roles each stakeholder plays, with customers increasingly able to conduct key parts of the application process on their own, changing the roles of brokers in the value chain. The companies that will succeed are likely to be the ones who strike the right balance between a proposition that customers trust and feel is useful to them. The quick success of online banks and account providers like Monzo, Marcus, and Revolut is evidence of consumers’ appetite for online solutions to traditional financial services when the proposition is designed correctly. 

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