The mortgage world is changing. Era-defining events, such as the global pandemic and the cost-of-living crisis, are shaking up household finances, with a growing number of customers finding their circumstances becoming more complex, through either missed payments on their credit record or changes to the way they earn their income.
At a recent launch event for the upcoming Pepper Money Specialist Lending Study, it was revealed that 15.16 million people had a history of adverse credit —missed payments, defaults, county court judgments, unsecured arrears, secured arrears or a debt management plan.
Innovation without insight is difficult
Meanwhile, 5.77 million people said they had taken on additional work because of the cost-of-living crisis.
At the same time, the introduction of Consumer Duty regulations has put greater emphasis on brokers and lenders ensuring that products and services are right for customers and offer fair value.
The Consumer Duty puts more responsibility on brokers’ shoulders as to how they research a solution for their clients, at the same time as those clients’ circumstances become more complex and disparate. This responsibility, of course, sits with the adviser who is providing the advice. However, where advice is given by appointed representatives of networks, for example, the network ultimately carries the regulatory risk, and monitoring the advice process of their members can be even more strenuous when at arm’s length.
Lenders that embrace this approach will adapt fastest to this new world and will, most likely, be the ones you find yourself using more
Lenders, too, have needed to adapt to the new environment, reviewing the way they develop products, with a spotlight on criteria, affordability and pricing, and how these interact with each other.
Disjointed thinking
We have recently seen a prime example of disjointed thinking, where this interaction has not been considered. A lender, intent on growing its volumes, continued to cut pricing in line with that of its competitors. However, this lender was not losing business based on its pricing. Its total available market had capped out based on its affordability and criteria.
So the rate cuts did nothing to bolster its business; they simply helped to eat into the margin of business that the lender probably would have won anyway.
Without data it can be hard to judge the impact of any changes
Put simply, it made the wrong decision and went down a route that was ultimately unsustainable, which isn’t a good thing for a lender or its customers.
The more complex customer environment presents opportunities for lenders to innovate and target specific niches, or move into areas that are currently less competitive, such as Skipton Building Society’s recent move into 95% LTV lending. There is certainly room for more innovation.
According to data from Mortgage Broker Tools (MBT), only 28% of all mortgage enquiries actually meet a lender’s affordability and criteria. This is an overall average, and it can range drastically by lender and type of case. For example, on self-employed enquiries the figure is 19%.
The more complex customer environment presents opportunities for lenders to innovate and target specific niches
However, innovation without insight is difficult and without data it can be hard to judge the impact of any changes. Lenders are often reluctant to introduce a criteria change to expand their proposition because they just don’t know what kind of business they will open themselves up to. The result is they move slowly, they don’t expand at the rate they want, and customers don’t get access to the products they need.
Market data is crucial to provide lenders — specifically their credit risk departments — with the information they need to make progressive product changes with confidence. The good news is this data-driven approach to more sophisticated product development isn’t just a pipedream for the future. It’s available now and some lenders are making use of it.
Era-defining events, such as the global pandemic and the cost-of-living crisis, are shaking up household finances
At MBT, for example, we work with lenders through our MBT Sandbox, helping them to analyse and model through data based on live case enquiries. Popular areas that lenders are exploring — particularly on maximising affordability — include extending the term or retirement age, reviewing the number of income types they will accept, and including more bespoke affordability rules for different borrower segments.
The mortgage world is changing and it requires a more sophisticated approach to product development. Lenders that embrace this approach will adapt fastest to this new world and will, most likely, be the ones you find yourself using more in the future.
Tanya Toumadj is chief executive at Mortgage Broker Tools
This article featured in the November 2023 edition of MS.
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