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Feature: How will the mortgage industry look in 10 years?

What will the mortgage industry look like 10 years from now?
Paul Thomas asked the experts

What a difference a decade makes. If you pick up a copy of Mortgage Strategy from November 2007, the contrast between then and now is clear.

Names that popped up 10 years ago, such as Northern Rock and Stroud & Swindon Building Society, no longer exist. Talk was not of mortgage rates hitting all-time lows but of whether the liquid­ity crisis choking non-bank lenders would soon end.

This magazine even carried a straw poll in which 80 per cent of brokers leapt to the defence of self-cert loans, which were subsequently banned.

This snapshot alone reveals how quick the pace of change has been over the past decade. With that in mind, what are the next 10 years likely to hold for our industry?

Mortgage Strategy asked some of the best-known names in the market to dust off their crystal balls and predict how the mortgage and property sectors might look in 2027.

Mortgage market

Ten years ago the market was governed by much lighter regu­lation than exists today, resulting in looser criteria among lenders. There was a thriving sub-prime market driven by dozens of non-bank lenders, often funded by US investment banks. And business was booming, with gross lending peaking at £356bn in 2007.

Technology was generally primitive, and mortgage rates were much higher than they are today. But everything changed in the 10 years that followed.

In the wake of the financial crisis, nearly every non-bank lender hit the wall and the number of brokers shrank to around 10,000, just a third of the figure in 2007. Lending suffered a similarly dramatic fall, plummeting to £133.9bn in 2010.

An average increase of 4 per cent per annum over the next 10 years seems very plausible. I think lending will get back to £360bn by 2027

Fearing a repeat of the loose lending practices during the run-up to the crisis, in 2014 the Financial Services Authority — the erstwhile City watchdog — introduced the Mortgage Market Review. With lenders having tightened criteria following the credit crunch, the MMR marked the end of an era for the mortgage market.

So what will the market of 2027 look like? Just last week the Bank of England raised the base rate to 0.5 per cent for the first time in a decade. It is expected to increase it further, but slowly and in small increments, possibly 0.25 percentage points at a time.

But with question marks over the ability of the economy to ride out the UK’s departure from the EU, it is difficult to predict the path of interest rates over the next decade.

Association of Mortgage Intermediaries chief executive Robert Sinclair says: “Base rate could as easily be at around 1 per cent in 10 years’ time as back at a more normal level, as predicted by the Bank of England, at 4 per cent.

“With the likely impacts of Brexit and general issues with global interest rates, it is unlikely to move outside this band.”

However, London & Country Mortgages associate director of communications David Hollingworth hopes the base rate will reach more “normal” levels, even if it means mortgage rates almost certainly follow.

He says: “It’s important to remember that the plummeting rate came as a response to the extraordinary conditions created by the credit crunch. If [in 10 years’ time] it’s risen to anything in the region of 3.5–5 per cent, we should at least be in a healthier economy as the need for a shot of monetary stimulus eases.”

Within three years of the credit crunch, lending had fallen by nearly two-thirds. In the seven years since, it has staged a reasonable recovery, hitting £245.2bn last year. But, again, our experts’ estimates of where lending will be in 2027 vary significantly.

Sinclair thinks lending will be “approximately 20 per cent higher than currently” — at around £294bn, or 17 per cent lower than the 2007 peak.

John Charcol senior technical director Ray Boulger, on the other hand, believes £356bn of lending — the level achieved in 2007 — is plausible within 10 years.

He says: “An increase of 4 per cent a year compound would be needed to get back to £360bn in 10 years’ time. My current forecast for 2017 is £255bn, which happens to be almost 4 per cent up on last year.

“An average increase of 4 per cent per annum over the next 10 years seems very plausible, provided we don’t have another major banking crisis. Therefore, I think we will get back to £360bn by 2027.”

Role of the broker

While there are estimated to be just 10,000 brokers in today’s market, they account for a record share of transactions. In 2009, less than half of all cases went through brokers, but more than 70 per cent do now, according to figures from UK Finance.

However, several threats on the horizon could challenge brokers’ hegemony.

Lenders often praise the vital role brokers play in their business; but, in truth, many would cut out the added expense of paying them if they could.

In February 2015, Mortgage Strategy reported how lenders were investing large sums in their online platforms to attract more direct borrowers. That trend is likely to continue, say experts.

Twenty7Tec managing director James Tucker says: “This is already happening. Intermediary market share is at its highest and is unlikely to increase further.

“The most cost-effective way for lenders to win back market share is via D2C technology, be that execution-only or remortgage/product transfer solutions. They may work more closely with comparison sites to facilitate such services.”

Nevertheless, Tucker and other experts believe brokers will remain key to the market. Shawbrook Commercial Mortgages managing director Karen Bennett says: “It remains to be seen what shape advice will take as we move into an ever more technologically dominant landscape. This will be a key driver of what the future holds for the broker advice model but I can’t see the scenario where brokers are removed from the equation altogether.

“If anything, the inexorable advance of our digital capabilities will free up time to do what brokers do best: advise and interact with their customers in a highly personal and service-led way.

“But many traditional brokers whose business model is based purely on face-to-face advice fear the impact technology will have on their business.”

A recent survey by Legal & General Mortgage Club found that 49 per cent of brokers saw robo-advice and technology as the biggest threat to their business within the next three years.

OneSavings Bank sales and marketing director John Eastgate says: “I think we will see consumers buying mortgages online; hence it is inevitable that there will be different players in the game.

“This poses real challenges for the mainstream broker and, increasingly, in order to survive and thrive, brokers will need to demonstrate something more — something unique, or at least difficult to replicate with a machine.”

Mortgage Brain chief executive Mark Lofthouse agrees, although he thinks online sales will be limited to simpler cases.

He says: “Robo-advice is much more likely for simpler products, like rate switching at the end of a fixed-rate period, than it is for a first-time buyer. The Amazon evangelists would no doubt say that Alexa will be able to do this (and she may) but, at the end of the day, it’s about how a customer wants to interact and many customers want to deal with people.”

However, Boulger believes true robo-advice is still some way off, arguing that what exists today is a “misnomer and all smoke and mirrors”.

Nevertheless, he agrees with Lofthouse that robo-advisers will be able to carry out simpler cases in the future.

He adds: “Artificial intelligence is advancing so quickly that, by 2027, it is likely to be capable of providing acceptable advice in some cases. However, AI will struggle with assimilating soft facts and assessing the more complex cases.

“Basic remortgaging, where the client doesn’t want advice, or at least doesn’t think they need advice on the amount borrowed or the term, is the type of broking where advice from a human is most likely to be challenged by robo-advice.”

Broker firms will focus much more on higher-value mortgages and those that are more difficult to place

Sinclair believes the increased use of technology will cause the adviser community to shrink.

He says: “There will be fewer advisers, more use of ‘para-planners’ and greater use of technology to assist and speed up the process. Broker firms will focus much more on higher-value mortgages and those that are more difficult to place. In addition, they will work more with older clients and first-time buyers — that is to say those that need advice.”

With technology set to play a bigger role in the market, what sorts of tool will brokers be using a decade from now?

Ten years ago, the first iPhone had appeared on the scene but
the main tools used by brokers were mobiles (for calls and texts), landlines, emails and fax machines.

Technology firms have since created single-application platforms for multiple lenders, meaning brokers do not have to re-key information. Tucker thinks AI will relieve brokers of many administrative tasks and help them stay in touch better with customers.

He says: “Artificial intelligence will help provide for better customer profiling at the outset, setting customer expectations of the journey they are likely to go through, and enabling constant con­tact with the client through the duration of their life.

“[Also, brokers will have] the ability to gather all the data about that customer without the need to fill in a fact-find — via open banking and access to social media, credit reports and other sources.”

Housing market

The mortgage market is not the only sector that is set to benefit from technological advances. Property technology firms are spending millions of pounds a year on ways to make the housebuying process quicker and simpler.

Property website Rightmove is just one of a number of firms that have trialled virtual reality headsets that allow buyers to view multiple properties in a single day without visiting any of them.

Adam Day, head of operations at online estate agent easyProperty, believes that is just the beginning.

He says: “I can see a time when tenants would be happy to view a property using a virtual reality headset and reserve a property with the click of a button.

“It may take residential sales a little longer because of the demographic of buyer and seller changing, because it is taking longer for millennials to own a home.”

Experts also believe greater inte­gration of conveyancers and mortgage lenders could slash weeks off the buying process.

My Home Move group distribution director Dev Malle says: “I see a critical change being the level of integration between lenders and lawyer, which will mean we will have automated legal advice and instant satisfaction of mortgage offer conditions through tech-led systems.

“This would mean, together with the industry acceptance of e-signatures, the borrower would be in a position to proceed with the mortgage on the same day that the offer was issued.”

However, while the buying process may become more efficient, continually rising house prices are likely to push homeownership further out of reach for many buyers. Online estate agent eMoov believes prices could rise by at least 56 per cent in the next 10 years, to an average of £347,757.

Day says: “The biggest challenge is prices going up and people being priced out due to lack of stock. There is also a problem with the older generation staying in their homes and not downsizing because there is nothing suitable to buy.”

It is, of course, impossible to predict the future, and a look back at the events of 2007/08 should remind us of our capacity to be caught out.

However, if even a few of our experts’ predictions come true, the mortgage market of 2027 will certainly be light years ahead of today’s.

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  • Tom O'Connor 15th November 2017 at 3:12 pm

    Hi, My senses on the world in ten years time is as follows:

    – More lenders, not less. With the actively encouraging the emergence of more challenger banks, as well as the arrival of new non-bank lenders, my prediction is that there will be more lenders. However, with access to big data, I think it is entirely likely that more specialist niche lending will emerge, which products tailored to the needs of a more segmented market place.
    – I think that there will be more innovative products; the wealth value of the housing stock is about £2.5trillion and 2/3rds is in the hands of over 55s. This trend is not likely to change for the foreseeable future, as many folk will prefer to stay in their homes, rather than down-size. I think that we may begin to see the emergence of mortgage products which might enable the generational transfer of wealth by putting part of the equity value of a property into a trust in favour of a child or grandchild. This might seem fanciful now, but given that many home owners are asset rich and cash poor, with the average price of a house is now approaching £230k, it’s not hard to see that something which reduces the value of their estate on paper without directly affecting the quality of their lives may be attractive.
    – In a more diversified market, with a multitude of niche products, here will continue to be a need for specialist advice. However, I think the days of the small individual broker provider may be numbered unless they integrate into mortgage networks. The costs and hurdles to be compliant in so many aspects of conduct and business means that they are in a perilous position.
    – With a more fragmented market, the need for better, faster and easier product sourcing will become a key enabler. These solutions will be able to exploit Open Banking making some of the grunt-work easier. But bearing in mind that what this gives with one hand, GDPR may arguably take away with another means that in some instances, for some customers, the time to offer may increase rather than decrease; particularly if they choose not to submit to auto-decisioning and profiling; necessitating good old fashioned underwriting.
    – AI and Robo-advice may start to gather pace, particularly for straightforward cases, but it is unlikely to overtake broker advice. It is more likely to become a substitute for direct sales staff in more traditional and some non-bank lenders.
    – I think the failings of the housing market will still be the major cause for house prices to rise, albeit at a slower pace than at present, as there seems no serious effort to address the widening gap between supply and demand.
    – House prices in those regions north of the line between the Severn and The Wash have flatlined, whilst those south of the line have surpassed their 2006 average prices years ago, reflecting the current economic reality of modern Britain. However, if the economy picks up in a post-Brexit world, we might see a reversal of macro-economic fortunes; and it might be the cities and towns of the north that see prices driven up, as a consequence of 21st century manufacturing industries being attracted to those areas.
    Between then and now, we have Brexit. Whether you are for it, or against it, it will cast just as long a shadow over our economy for the next ten years, as the Credit Crunch did for the past decade. My prediction is that despite assurances that funding commitments to 2020 will be honoured, a government who is adverse to higher taxation and promotes austerity is unlikely to plug all of spending the shortfalls. My senses are that we will not be shaking the last of the Brexit dirt from our shoes until the 2030’s at which point, we will know if we left just before the EU “family” fragmented or whether we left and found ourselves isolated and on the outside.
    If you think that the last 10 years was a hell of a ride: you ain’t seen nothing yet.