Will we soon be able to switch our mortgages as quickly as our bank accounts or energy deals? The Government certainly seems to think it’s a good idea. But just how realistic is this?
A fortnight ago, the Department for Business, Innovation & Skills launched a consultation document on “Improving the Consumer Landscape and Quicker Switching”, which raised the prospect of “employing simultaneous legal processes” to enable borrowers to remortgage within seven working days, meaning essentially everything from conveyancing and the review of documents to the transfer of funds all happening at the same time.
Speeding up the mortgage process would undoubtedly be welcome. Technology is shockingly under-utilised in the mortgage market. That it can currently take as long as three months to complete a remortgage is crazy. A requirement to speed up the mortgage process could be a great incentive for technological innovations.
For example, far more lenders would have to make use of automated valuation models (AVMs) when considering an application than is the case at the moment. This may prompt further development and innovation from AVM providers, which would be no bad thing.
However, we should remember that so-called ‘sophisticated’ AVM’s were used extensively in the US, leading us into the credit crisis.
The way the Government wants to force this change is at odds with how the mortgage market works and what’s needed to keep mortgage underwriting standards as high as possible.
Demanding instant implementation of a 7-day switching rule isn’t suitable because the right technology innovations to achieve this goal won’t happen overnight. The best technology tools are those that are developed incrementally, solving individual issues in the mortgage process, not those that claim to revolutionise systems in one go.
Moving your £20-a-month mobile phone contract between operators within a week is one thing. But to move a mortgage for hundreds of thousands of pounds between lenders, with all of the legals, searches and fraud checks involved, is quite another.
The best lenders work incredibly hard to get the underwriting right – keeping fraudsters at bay, ensuring the suitability of the property or land, checking the creditworthiness of the borrower. The pursuit of speed for speed’s own sake, in order to hit arbitrary Government targets, could put all that at risk. Mistakes will inevitably be made.
We simply cannot afford to open up the smallest opportunities for the scammers.
If the Council of Mortgage Lenders is right in its interpretation of the Government wording – that the seven-day period only begins after all of the risk assessments and affordability checks have taken place – then you have to wonder how this rule can improve the customer experience of swapping mortgage lender, as it purports to do. How can you have a seven-day switching rule that only begins after the most time-consuming searches and checks are done? On current mainstream mortgage turnaround times, this would actually result in a ‘seven day’ switching period that takes longer than three months.
In bridging it is possible to complete a deal within a couple of days, but a mainstream mortgage is a different beast. Nonetheless there are lessons that the wider mortgage market can learn from bridging about how to complete a deal quickly.
For starters, you need to have all of the relevant deal information in place from the outset. And that information has to be absolutely accurate – there is no room for errors or oversights. So everyone, from the broker to the lender, needs to be asking exactly the right questions, and sharing that information with the right people.
You also need the highest quality legal team involved. There is an enormous amount of important, detail-intensive legal work to complete, whether you’re dealing with a traditional mortgage or a bridging loan, and a competent, nimble, adaptable legal firm is a must.
Finally, communication is key. There will come a time when all of the stakeholders in a mortgage deal, from the borrower and broker to the lender and solicitor, will be able to track the case’s progress in the cloud. We aren’t there yet, so keeping everyone updated on where the case stands, and what needs to be done to push it forward, is down to regular phone calls and emails.
The Better Markets Bill is a great initiative and I don’t doubt the Government has the right intentions here. There are lessons the mortgage market can learn from other areas of financial services about how incorporating technology can add momentum to existing processes. But this must be done properly, without risking the stringent underwriting standards lenders have dedicated so much time and effort towards developing.
Christian Faes is co-founder and CEO of LendInvest