The big fixer-upper: How to solve the problems in the mortgage market
We've sent people into space, built driverless cars, and engineered robots that can think like us. And yet, fixing the mortgage approval process still seems out of humanity’s reach.
The market is riddled with inefficiencies. Consumers are forced to fill out documents detailing every corner of their lives, while clunky underwriting processes mean that it can take months before a mortgage is approved.
That’s not to say that there aren’t brilliant tech companies out there that are trying to improve the market, but most of the established lenders are stuck in their ways, using old technology that is not fit for our modern-day lives.
And while financial advice is meant to guide consumers towards the most suitable and best value mortgage, evidence suggests that this isn’t always the case. According to figures from the Financial Conduct Authority (FCA), 30 per cent of consumers could have found an identical or better mortgage that was cheaper than the one they bought.
Perhaps the most troubling part about the watchdog’s findings is that receiving mortgage advice made no difference to the likelihood that people overpaid.
In light of this, the FCA proposed changes in a paper published last week, focusing on how technology can add value for consumers, while also suggesting that financial advisers explain why they have not recommended a cheaper mortgage.
So where are the problems in the mortgage market, and what can be done to fix them?
While no one is doubting that technology is useful, consumers are getting increasingly confused when it comes to the distinction between advised and non-advised platforms, as well as the difference between automated, human, and hybrid advice.
Daniel Hegarty, founder of online mortgage broker Habito, says we need a clear definition of the parameters.
As it stands, most mortgage sales are fully advised, but the FCA has proposed that more mortgages should be bought on an execution-only basis.
However, without an adviser, it’s debatable whether this would solve any problems. Hegarty admits that execution-only mortgages have a role to play, but he also warns that they carry the risk of consumers choosing an unsuitable deal.
As it stands, most people switch mortgages every few years when their term ends, but this means that many consumers are unlikely to have the best deal on offer at all times.
Ross Boyd, founder of mortgage switching platform Dashly, suggests that mortgage comparison should be “live and ongoing”, meaning once a mortgage is plugged into a platform, the tech constantly searches the whole market for saving opportunities.
“Right now, many people with mortgages are paying more than they need to, but big data and machine learning can solve this by scanning the entire market each day in a way no human can."
For example, he explains that if your mortgage balance is falling and your equity is rising, you could have moved from an 80 per cent to a 75 per cent loan-to-value mortgage, which could reduce your payments significantly, even taking into account the early redemption charge and all switching costs.
Boyd also points out that this removes inertia from the equation.
Essentially, technology should bring down the barriers to switching, while also making sure that customers aren’t bundled into a one-size-fits-all bucket.
"People now expect the mortgage process to be as frictionless and digital as other areas of their lives," says Conor Murphy, chief executive of Smartr365, pointing out that verifying ID, and checking affordability and creditworthiness can all now be automated.
"If the mortgage industry adopts an ‘end-to-end’ digital approach, where the administrative part of applying for a mortgage is done online, it means more customers will get access to the right mortgage advice for their needs.”
Open Banking makes it far easier for providers to securely access your financial data, which in turn should speed up checking systems. As Hegarty says: “The market needs more transparency from lenders on mortgage eligibility, potentially paving the way for customers to have near-instant offers.”
While much of the mainstream mortgage market is still plagued with sluggish underwriting processes, companies should make use of the data available to offer accurately priced and flexible loans.
Kevin Roberts, director of Legal & General Mortgage Club, says that many mortgage businesses are improving their criteria search systems, which is helping advisers find mortgages for clients based on specific borrowing needs.
Removing paper application and streamlining data-entry will also speed up the process, provided we can get all the companies in the industry to adopt it. As Roberts points out: “We have become accustomed to using technology in our everyday lives, so there is little excuse for the mortgage industry to fall behind the curve.”