Nonetheless, I am often asked why there is no equivalent of Rocket Mortgages in the UK. Rocket was able to disrupt the US mortgage market in 2013 by offering a quick online mortgage offer, and within five years, had become the biggest retail lender in the US. So why, nearly 10 years on, has nothing similar happened in the UK?
Well, to a certain extent, it has happened, just on a small scale.
Atom Bank were the first to offer a fully digital mortgage back in 2016, claiming to make an offer in under a minute. Other lenders, both established and new entrants such as Molo now have the capability to make offers on straightforward cases in under an hour without the need for paper documents. Others such as MPowered have sped up the paper document process using AI.
However, this has not yet led to significant market disruption.
All the data needed to make a mortgage offer is available digitally including property valuations, income verification, banking data, credit records and identity verification. However, automated underwriting using this information without further validation is still rare, and is only used for a small number of the simplest cases.
Meanwhile, the industry, the regulator and customers themselves continue to lament the time, complexity, stress and uncertainty involved in getting a mortgage and buying a house. So what is holding the UK industry back?
There are three key barriers: the UK funding model, the distribution eco-system and, ultimately, industry culture.
The funding barrier
Unlike the US, where a federal mechanism for wholesale funding exists, or European markets where insurance funds invest in covered bonds backed by mortgage securities, the UK mortgage market is dominated by six deposit-taking banks and building societies, who together account for over 70 per cent of all lending. These are household names with low cost of funds, high brand recognition and long-established retail presence.
Their balance sheet business models largely rely on attracting retail savings to match retail lending, with hedging and securitisation playing a supporting role. Crudely, this means the rates and duration of loans broadly needs to match the rates and duration of savings.
This model, together with complex legacy technology, restricts flexibility, and leads to complex and rigid credit risk policies and procedures, which are resistant to the simplification and streamlining that digital underwriting offers.
The distribution barrier
The UK market is highly intermediated by brokers and financial advisers. Unlike in many other countries, the direct channel is small, at two to five per cent of the total UK market. This is partly due to regulation which requires advice in most cases, and partly due to the lenders’ dependence on the brokers for distribution.
The broker channel is highly fragmented, both in terms of industry structure and technology. No single mortgage broker firm has more than around five per cent market share, and there is a complex web of firms, networks, clubs and technology platforms. There is no single set of common technology and data standards and no single hub for product information, decisions in principles and mortgage applications, despite efforts by Iress, Mortgage Brain and Twenty7Tec.
The dominance of the largely manual broker channel, combined with the requirement for human advice, the fragmentation of the industry and lack of common technology and data standards make it hard to bring rapid digital decisions to market.
It is not for lack of trying.
Digital challengers such as Habito, Trussle and Burrow set out to solve this problem. However, none have managed to automate advice, and scaling the digital model has proved difficult.
Without a dominant technology platform or scale digital broker to work with, delivering a five-minute decision involves either bypassing mortgage brokers, or managing bespoke integrations to multiple systems and processes.
The cultural barrier
Contributing to these other barriers is a final factor, which we might call industry culture.
The complex structure of both lenders and distributors favours the status quo and makes change hard. For good reason, following the financial crisis of 2008, the industry remains risk averse. The regulator rightly leans towards consumer protection, but in practice that has the effect of reducing risk appetite.
The biggest lenders have the most to lose from change, and due to their complexity are least able to deliver it. Speeding up and automating decisioning will ultimately require buy-in from credit risk departments. The barrier is ultimately more about risk and governance than technology.
As for the second tier of smaller lenders, where we might expect to see more innovation, these are mainly traditional building societies, who while less complex, are inherently risk averse. They also typically have credit policies which are very bespoke to the niches they serve, and therefore, harder to automate.
Cultural change, as well as change in people and leadership will be needed to see real progress in both the large banks and second tier.
Is there a solution?
Clearly in a situation this complex and protracted, there is no easy answer. However, the catalyst for change could come from one of four directions, or through a combination:
- A major lender decides to break rank and set out their stall around consumer convenience. This would require brave leadership prepared to re-cast the approach to credit risk, and re-engineer underwriting – a daunting task.
- A well-funded new entrant (possibly from overseas, or one of the challenger banks such as Revolut, Chase, Monzo or Starling) with deep enough pockets to persist in bringing a new funding model and digital origination to the UK market, either focusing on building a brand in execution-only or engaging actively with brokers.
- One or more of the leading broker firms takes up the cause and investing in building the data and technology for quick decisions upstream into their customer journeys, helping to create a market for speed and convenience in mortgages.
- The regulator decides that consumer convenience is a benefit worth prioritising alongside fairness and value, and looks for a regulatory approach to drive common standards, and promote adoption of digital decisioning.
