For decades the way that we borrow mortgages has remained largely unchanged.
We may have moved on from the days of visiting a building society branch manager in person, to speaking to an in-house adviser or mortgage broker who speaks to the lender on our behalf, but essentially the chain of command still runs from the lender down to us – the borrower.
That is changing finally – and rapidly.
Mortgage lenders and brokers still deal in reams and reams of hard copy paper files
While other markets have seen buying power shift from companies to consumers over the past decade, putting us in the driving seat when it comes to ordering our clothes, food or transport, the mortgage market has resolutely resisted.
In fact, it’s one of the last bastions of actual paperwork you hold in your hand.
This is a land where fax machines are still used daily.
But 2019 marks a watershed moment for how we buy mortgages. A few things have happened in the past month that mark this as a definitive line in the sand.
The first is that Habito, a mortgage broker that styled itself as offering advice online, was granted permission by the regulator to become a mortgage lender this week.
It has launched with a range of buy-to-let deals, which borrowers can apply for and then, crucially, get an approval online in seconds.
The firm won’t disclose who is providing its funding line, but confirmed that an initial commitment of £500million is being provided by a ‘leading Financial Conduct Authority-regulated financial institution’.
It has also said the firm is ‘working with a number of large financial institutions to bring a range of residential mortgages to market in the coming months’.
The second thing worth noting is that peer-to-peer lender Landbay has secured a £1billion funding agreement with another ‘major financial institution’ to finance mortgages offered through its platform.
John Goodall, the firm’s chief executive, said it represented ‘another flagship partnership between traditional finance and fintech’.
He added: ‘We have spent the past five years investing in technology, building a platform that we’re proud of and one which is robust to withstand growth without compromising on credit quality.’
Get a mortgage online
There are multiple ‘online’ mortgage advisers claiming to provide you with a personalised mortgage recommendation online.
Few really do this in practice, instead handing you off to an adviser over the phone.
Find out more about the different online mortgage firms and how they compare here.
The third thing to catch my attention was a number given to This is Money exclusively this week.
London & Country, the UK’s largest independent mortgage broker and This is Money’s mortgage partner, revealed it has successfully processed a whopping £7.7billion of mortgage applications through its online mortgage finder since its launch 18 months ago.
The firm says this ‘underlines how comfortable customers are to start their journey online and, as technology improves, it’s possible that they will be more comfortable in receiving advice with less or even no human interaction’.
The firm is also currently working with the FCA in its so-called Innovation Sandbox to ‘develop a platform that allows a customer to interact, select and transact their mortgage end-to-end online’.
Getting rid of the middlemen
One of the main drivers behind the Government’s decision to embrace open banking at the start of last year – forcing our biggest lenders to open up their tech to authorised third parties – was the desire to disintermediate banking. That’s a facny way of saying shaking up the system to connect customers better to who they are doing business with and give them more control.
In markets where there are lots of middlemen, there are lots of people in the chain who need to be paid. That pushes the price of goods up and it’s customers who pay.
Take the traditional home loan market: currently there’s mortgage funder, mortgage lender, mortgage broker, mortgage borrower.
The obvious thing to do is cut out the broker.
But in practice that hasn’t worked and, in fact, the Mortgage Market Review shake-up a few years ago led by watchdog the Financial Conduct Authority that meant most people had to take advice when getting a mortgage, firmed up the broker’s role.
Brokers haven’t been cut out because they provide borrowers with a service they value – including advice on what sort of mortgage (out of thousands) they should get and handling the mind-numbing mountain of paperwork required by the lender.
This is why Habito’s decision to become a lender is telling; it reveals they see the value of taking control of more of the mortgage chain.
Rather than ditch the mortgage adviser element though, they’ve ditched the lender and gone straight to the funder.
(It should be noted, Habito will also continue to advise borrowers on mortgage products from other lenders as well.)
But the point here remains: there’s masses of cheap money sloshing around the market from funders today that don’t have the set-up to lend.
Until very recently, they needed a lender to write the mortgage and the broker to bring the customer.
Habito and Molo have both confirmed plans to launch fully advised digital mortgages in 2020
Habito wanted to be a digital mortgage broker with technology that allowed borrowers to apply for, be advised, assessed and gain approval online for a mortgage from a range of mortgage lenders across the market.
But it has not quite managed to do this. Not because it wasn’t capable technology, but for the reason that lenders refused to play ball.
Too many wouldn’t link their own technology with Habito’s, and so the digital broker was hamstrung – its clever system was only as good as the data put in, and lenders refused to share access to their data.
Even the FCA has clocked how difficult lenders are being, noting in its recent Mortgages Market Study report that ‘while a few lenders have been willing to share [information about their approach to affordability, risk appetite and credit scoring] with specific commercial partners, most are uncomfortable sharing it widely’.
It’s even gone so far as to suggest it might be forced to intervene.
That’s why this latest move is interesting. Albeit on a tiny scale, Habito has removed the banks from the equation.
The initial launch into buy-to-let this week is most likely simply a dry run in an unregulated market. The big change will come when Habito offers residential mortgages.
It’s also not the only one planning this. Another challenger, Molo, launched six months ago as a fully advised, end-to-end digital buy-to-let lender – also funded institutionally.
Chief executive Francesca Carlesi said: ‘We knew we had to launch direct to customers from the start, covering the full value chain, from the borrower’s application to delivering our lending decision.
‘It is the only way to give our customers what they deserve: quick decisioning, transparency and certainty.’
With applications totalling more than £250million so far, Carlesi says they’ve confirmed there is demand from landlords for this type of proposition and reveals they’re planning to launch residential mortgages next year.
This is disintermediation in action: Molo launched as a lender with a digital adviser facing the customer; Habito did it the other way around, launching a digital adviser that has added lending capability.
Both, have cut out a middleman – something which in future could and should drive down costs and therefore save customers money.
Peer-to-peer lenders are also at it
The move from Landbay is another example of the level of demand there is from institutions for long-term assets backed by UK property that throw off a decent income, as secured loans with interest are gradually repaid.
LendInvest made a similar move earlier this year, pulling its personal investor offer completely and switching to using institution’s money instead.
While these two platforms provide mortgages only to landlords and property developers, there’s no reason that they could not, with the right regulatory permissions, extend into the residential mortgage market.
Consumer demand for digital mortgages is building
A recent survey carried out by trade publication AltFi in partnership with Streetbees of 1,000 consumers, found that just 27 per cent of British adults would consider taking out a mortgage with a digital bank.
Some 36 per cent said their reason was they’d prefer a traditional bank; 11 per cent said digital banks wouldn’t last for the lifetime of their mortgage.
But what of the remaining 53 per cent?
I may be reaching, but a sensible reason would seem to be that’s it’s cheaper to go for the established high street lenders via a broker that offers access to mortgage deals from all lenders.
This is what makes that £7.7billion number from L&C Mortgages so interesting.
The moves by Habito, Landbay and Molo are not revolutionary in terms of volume; and they won’t affect how you apply for and get your mortgage this year.
But they pave the way for a future that looks quite different from the one we have today.
London & Country’s experience seems to show that customers are already champing at the bit for an easy digital application and approval process.
Finally, it seems that it’s not that far off.