With the Bank of England raising interest rates ten times since December 2021 up to 4%, mortgage approvals recently hit their lowest level in two years as buyer affordability has declined amid falling house prices. This article considers how FinTech could refurbish the mortgage industry and what this would mean for prospective buyers in the future.
Buying your own home is an aspiration many of us share. Currently, however, the UK housing market, which has seen a “marked slowdown” over the last six months, does not look very enticing. In 2023, prices are expected to fall by 8%, after four months of decline, as the rise in interest rates and the mounting cost of living take their toll. Despite this decrease, the average property will still be more expensive than before the pandemic.
Crucially, while mortgage rates are slowly falling, they will still be much higher than in recent years. Rates spiked last September when the then-government announced billions of pounds of tax cuts prompting the Bank of England to hike interest rates to curb inflation. As the “mini-budget” measures were reversed, lenders have felt confident in cutting rates, but buyers remain cautious. In October 2021, for example, the cheapest fixed rate mortgage was just 0.84% but as of January 2023, a five-year fixed rate for a first-time buyer is now 4.84%. Fundamentally, despite optimistic forecasts for this year, confidence in the market has taken a significant hit.
With rents rising at their fastest rate in seven years, and the cost of living, according to Cambridge economist Andrew Harvey, “set to outpace earnings growth by a significant margin again this year, while labour market conditions are widely expected to weaken,” UK Finance has forecasted a drop in house sales by 21%. Remortgage activity is also threatened and the two million homeowners whose fixed rate deals expire this year (57% of which were set at 2%) now face higher payments.
Generation Home (Gen H) is one start-up aimed at improving buyer affordability – in November, it received £600 million from Nottingham Building Society to support its income and deposit “boosters”. The latter allows an uncapped number of people to contribute to a buyer’s deposit. Furthermore, this month, Gen H announced its switch from standard variable rate mortgages to base rate trackers which offer more transparency. Going into 2023, Gen H will be one of the very few lenders with a tracker revisionary rate, where revisionary means after the fixed rate term has ended, demonstrating the impact of start-ups and wider deployment of FinTech on the market.
With space for innovation, the mortgage industry’s future will depend heavily on FinTech developments. Firms aim to streamline and, more importantly, speed up the mortgage application process. Automated services can identify the best deals on the market and assess the suitability of borrowers faster. For instance, FinTech firm Twenty7tec recently bought Broker Sense, a mortgage affordability platform that allows advisors to assess client affordability against nearly one hundred lenders while recommending the optimal deal, having entered their client’s data only once. Another example of automation in the industry is Mortgage Broker Tools’ (MBT) recent deployment of a modelling instrument called MBT Sandbox that offers lenders real-time updates on prices, predicts application numbers, compares their products with their competitors’, and gauges the impact of rate changes.
Other innovations in the sector include tracking systems that allow customers to check their application status and the use of “post-completion” tracking which helps borrowers ensure they have the best deal available. Moreover some firms have been able to offer greater transparency while removing third-party verification, using decentralised finance (DeFi) technology. This includes smart contracts, which convert agreements into code that executes automatically upon the terms being met, which are “permissionless” and can be implemented without third-party involvement. Some decentralised firms have become disruptive lenders, such as Bacon Protocol which enables homeowners to give a lien on their property for an NFT they can use as collateral for a loan. Overall, the increasing application of DeFi technology in the mortgage sector specifically, creates the potential for a range of more unconventional services.
In addition to making the process more efficient, FinTech can also improve user experience. Meeting online with a single point of contact is more convenient for customers, and the application of big data and AI enables firms to reach historically underrepresented communities. FinTech firm Nous, as an example of improved user experience, launched an online tool that helps customers avoid what they term the “mortgage house trap”, where borrowers in negative equity, most having a high loan-to-value mortgage, are forced onto their lender’s standard variable rate. By planning for financial stresses a year or two early, Nous users can evade the trap.
Another salient development in the mortgage industry is the rise of digital lenders. Although challenger banks like Starling or Revolut have growing name recognition, an October 2022 survey showed that when it came to mortgages, 34.2% of respondents expected a product from traditional firms (e.g. Halifax or Nationwide) while just 18.6% thought the same for challengers. Digital lenders usually try to market and distinguish themselves with their ease of use and speed, but it is clear that they cannot compete on user experience alone. Offering mortgage products to rival those of the high-street names, as Atom Bank tries to do with its first-time loans and near prime rate, requires capital that many digital lenders do not have yet. Instead, it could be argued that more unconventional approaches are necessary. For instance, Habito and Molo (a buy-to-let lender) both offer fixed term rates for up to forty years, an example of start-ups trying to carve out a new segment of the market. This is despite fixed term deals of more than the traditional two or five years being typically unpopular with British borrowers as they are generally more expensive. While brokers who increasingly refer clients to digital lenders often cite their adaptability and stronger social media presence, these start-ups crucially need to offer more distinguished products, such as green mortgages, to truly compete with established lenders.
To conclude, rather than a revolution, the expansion of FinTech in the mortgage sector will be more of a slow burner over the coming years. As automation and DeFi technology grow more popular, start-ups looking to disrupt the industry will need to offer unique products that appeal to the buyers of today and the near future. For example, green mortgages, which offer lower rates for more energy-efficient properties, are set to grow in popularity, especially as both fuel bills and climate change are becoming more important to customers. Issues facing prospective buyers and sellers in today’s housing market highlight the potential for disruption by start-ups that offer not only enhanced user experience but also foster a more innovative mortgage sector.