By FintechOS · August 08, 2022
5 minute read

Digital mortgage automation: making mortgages manageable

Digital mortgage automation: making mortgages manageable

Digital mortgage automation is quickly becoming the standard for the mortgage industry. We look at why it’s crucial for mortgage lenders to undergo a digital transformation before it’s too late.

The cost-of-living crisis is exacerbating the challenge of getting on to the housing ladder. People looking to buy homes were facing asking prices 13% higher in June 2022 than they were at the same time in 2021 according to Halifax. Meanwhile, the average cost of renting for UK tenants rose 2% in 2021, the biggest increase since 2017, according to the Office of National Statistics.

UK mortgage approvals were at a 22-month low in April 2022. Affordability remains the most significant barrier. The average house in the UK currently costs more than eight times average earnings. While the average first-time buyer’s home costs more than five and a half times the average income.

To start with, first-time buyers are not only struggling to put up a deposit. According to Atelier Capital Partners, the average mortgage deposit paid by first-time buyers surged to 24% to GBP 60,000 in July 2021 from the previous 12 months.

Secondly, many are unable to demonstrate to lenders their ability to meet eligibility criteria. Following the global financial crisis of 2007/2008 regulation from the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) limited most home loans to a maximum of 4.5 times income or higher to no more than 15% of approved loans. Furthermore, lenders need to ensure that borrowers can afford repayments if interest rates rise, so banks must scrutinize what cash borrowers have left over after their regular outgoings have been accounted for.

Digital mortgage automation broadens affordability 

There are a number of ideas banks are exploring to widen the options for first-time buyers. Some of these include:

  • 40-year mortgages
  • More long-term fixed rate mortgages
  • 95% mortgages
  • Intergenerational mortgages
  • Innovative approaches to loan-to-value lending
  • ‘Low-start’ mortgages

How digital mortgage automation can help

Combining product innovation with digitization of the entire mortgage process from search and application through to approval could also transform eligibility and access. Banks and mortgage providers understand the value of integrating technology into their services, but often this goes little beyond providing a website or an app; digital involves truly integrating tech in all aspects of the digital mortgage automation process.

Ways that digital mortgage automation can help buyers:

  • Open banking
  • Self service
  • Harnessing APIs for a more seamless mortgage process
  • Artificial intelligence and machine learning
  • Real-time responses
  • Big data
  • Back-office automation
  • Mortgages on the go

All of these approaches and developments could go some way to saving the customer money. Improving the customer experience, tightening up back-office processes, and reducing hours spent on mortgage administration could also save the provider money which could allow the lender to offer cheaper mortgages to customers.

Some digital providers don’t charge their customers a fee to use their service, their model is to commission brokers to bring customers. The advantage of this is that it cuts the customers’ traditional setup costs in paying the lender to give them a mortgage on which they will pay a lot of interest over the mortgage. It also acts as an incentive for lenders to make sure the customers get the right product.

Many businesses transitioning to software-as-a-service (SaaS) subscription model can offer their customers more flexibility and options for payment. It makes it easier for customers to choose the best payment type to suit their financial capability and ensures an income for the company. In the mortgage industry, this could allow for a tiered model.

New providers can help borrowers develop alternatives to free up their finances to have the liquidity to purchase their first home. For example, Tembo has provided a facility where a family member can be involved to top up the borrowers’ deposits or underwrite the mortgage payments.

Regardless of what one single provider might be able to achieve for the customer, the digital process trending in the mortgage lending sector as a whole should allow for easier comparisons and competition. Through online tools, borrowers can quickly compare interest rates, loan terms, and different customizable solutions to match their individual requirements.

Ultimately, digital can drive innovation allowing lenders to respond to changing regulations or economics to package and deliver new products to borrowers fast.

Barriers to digital mortgage automation

While the benefits of digital to businesses and their customers are clear, lenders face a variety of challenges in implementing the many digital and artificial intelligence (AI) benefits in their operations. It’s a high-stakes process that demands an approach that fits with the business.

According to research by Boston Consulting Group, 70% of digital transformations fall short of their objectives, and sometimes the consequences of failure can be far-reaching. There are several reasons for this:

  • Starting with the wrong data
  • Implementing new tech on old systems
  • Uncertain end-user experience goals
  • Using an outdated tech stack
  • Lack of necessary skills in the business

Solutions for established lenders

Given the challenges of core transformation, lenders and established banks with legacy systems need to consider the best approach given their systems and operations. Digital transformation is a hugely complex activity to execute. The business needs to work seamlessly between the frontline business, operations, risk policy, credit decisions, analytics, and the data that links everything together.

The question for large lending organizations is: do we build a bespoke end-to-end solution or buy in the technology and implement it fast? Core transformation may not necessarily be the best approach to improving customer service and increasing customer eligibility.

Instead, a digital on-top strategy that layers digital tools over existing products and operations could provide a more adaptable solution. It can minimize the risk involved while meeting new customer demands sooner.

To learn more about digital mortgage automation, book a demo.

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