Why are mortgages broken and confusing?
It’s no secret that mortgages are a broken process. Research by Habito revealed that 62% of those who go through the process felt stressed out. And from personal experience, I can tell you that remortgaging is a hugely difficult and opaque process. How can this be the case in 2019?
Since the global financial crisis, UK regulators have created an environment that capitalises on competition and is constantly pushing for new ideas and methods to revitalise the financial sector. It’s why London has become the global fintech hub.
The state of the market
So what’s gone wrong with mortgages? They’re the biggest financial product the average person will ever use, so why are they so outdated? Sure, the financial crisis was brought on by sub-prime lending and that’s why mortgage and remortgage applications have become more rigorous. But rigour doesn’t demand outdated processes.
The mortgage market is fickle and subject to sudden change. That’s how it can feel as a customer. As one person I spoke to told me, even with investment banker training, founding a mortgage-based startup and years of experience in the financial market it was still impossible to tell what was going on behind the scenes at the bank when it came to applying for a mortgage.
How can we possibly expect customers without an intensive financial education to make an informed decision about their mortgage?
The truth is we can’t. Mortgage products are utterly impenetrable to customers. Part of that is due to the colossal amount of written work occurring at the back end, there’s been little work done to digitalise the process. Of course, some banks are leading the way forward on this issue. 11:FS Foundry partner, DNB, has automated a significant number of its manual processes because the bank recognises that things cannot continue as they have been, and customers demand a much better experience.
Our Norwegian partner has been working with the government to create a system that, with customer consent, automatically directs all pertinent data to the bank when needed. It’s a personalised service that simplifies the mortgage process for customers and doesn’t result in endless form filling and refilling.
The fact that the tax authorities and the banks have been working together is the most important enabler for digital applications and straight through mortgage processes
Toril Steinmo, Product Owner Mortgage Digitalization, DNB
It’s a small step to making mortgages less sticky but at least something is happening. In the UK, as a customer, it can feel as though banks are going out of their way to make the situation more complex with manual paper-based processes inflicted on customers at every turn, which only serve to confuse and pressurise.
But it’s not for the sake of making a sale, less than 24 hours after receiving an offer the deal can change - the offer was only good for that day when the market was in that position. It’s a difficult thing to justify to customers, and the process is evidently misleading. Research by Habito has found that 60% of mortgage holders end up putting off switching due to confusing contracts.
Customers have been disempowered by both the market and the banks involved in the process. Unlike the digital banking landscape, mortgages have failed to put customers first. Instead of focusing on developing products that allow customers to interact with and manage their property debt in a significant way, the industry has stagnated.
Innovation is coming, and it’ll be a powerful thing when consumers’ mortgage needs, and capital demands, meet
Daniel Hegarty, CEO of Habito
Part of this is due to the lack of a competitive environment around mortgages. But banks have also become comfortable with the situation as it is. The situation as it is may not be the most efficient, but it’s still profitable. OakNorth has recently announced a move into the retail mortgages space, the first challenger to do so and aimed specifically at the atypical incomes some individuals have that banks are ignoring.
And it looks like more fintechs will be entering the space in the near future. I spoke to startups, banks and regulators about the issues with mortgages and Fintech Insider will be releasing a roundtable discussion on that soon. And all of them recognise that the mortgage system needs to change.
It’s not just because delivering a better customer experience is important, but a clearer process will mean stronger insights into mortgages and protect banks from lending to sub-prime customers.
All of this isn’t even taking into account the equally impenetrable stage of the process that revolves around solicitors and waiting for chains to be actioned. All of which contain longwinded and paper-based processes as well.
Entering the market
For many potential customers, just getting onto the housing ladder is a difficult task. And innovation around creating financial products aimed at getting customers on the market are rare. But, there are some interesting moves being made out there. After my LinkedIn post, I spoke to the CEO of Proportunity, Vadim Toader who has created a product aimed at delivering deposits to struggling first-time buyers.
The number of people buying a first-time home has dropped by 200,000 in 18 years. Over 70% say large deposits are the biggest roadblock
Vadim Toader, CEO of Proportunity
Fewer people are buying homes and a major reason why is because they simply can’t afford them. It’s not just to do with an economy in recovery and 11 years of austerity. Interest rates today are based purely on a worst case scenario basis for the bank - the borrower will default on the debt.
That in itself makes sense after all the global financial crisis was created by banks, in part, overextending themselves with sub-prime mortgages. However, what’s less understandable are market prices. Just 0.04% of the London housing market drives pricing and that’s based on the wealthiest part of the market, which drives up initial deposits to near-unachievable levels.
Some products are being made to combat this reality, but with a market driven by the worst-case scenario, it may take regulatory reform to see a real change made.