The future of mortgage advice. Part man. Part machine. Part one
Robo-advice, the phrase coined by the industry, is already alive and well in the wealth and IFA space, but took a little longer to make it to mortgages. Trussle.com which launched in December last year, is bringing the robo-advice model to the mortgage world.
The website, founded by entrepreneur CEO Ishaan Malhi was the first of its kind to hit the UK market in December 2015 and another, Habito, joined it last week with others reportedly not far behind.
In a similar vein to the wealth advice models, Trussle.com asks potential clients to fill in an online form detailing circumstances and needs and an algorithm recommends the optimal product.
A few weeks ago, the Financial Advice Market Review (FAMR) recommended the regulator build on the success of its project to promote digital development for good consumer outcomes in Project Innovate to establish an ‘Advice Unit’ to help firms develop their automated advice models. The Trussle.com software neatly falls into the regulator’s sweet spot as a fintech firm ahead of the curve looking to bridge the advice gap, so Malhi has been invited to see the Financial Conduct Authority (FCA) three times in just over a year.
The regulator is keen to help financial services firms find more efficient, cost-effective ways to provide not just suitable advice but the best possible advice which current systems and processes arguably don’t always achieve.
What is Trussle.com?
Trussle is a Mortgage Advice Bureau (MAB) Appointed Representative (AR) with its own team of mortgage advisers and proprietary software powering its website. In recent months it has been hailed as the UK’s first online mortgage adviser.
At the back-end, the software is also a sourcing, Client Relationship Management and lead generation system with live chat functionality.
Trussle, which has raised £1.1m of seed capital, announced an exclusive strategic partnership with the Zoopla Property Group in February. It is set to provide an integrated advice service on the Zoopla property search engine and uSwitch comparison site, which are both due to go live later this year.
Robo advice in action
“We wanted to take the repeatable and predictable grunt work out of advisory, leaving our advisers to focus on value added advice to customers, if and when they need it,” says Malhi.
“By automating the lion’s share of an adviser’s work, the capacity our advisers have to help customers is unrecognisable to that of traditional brokers.”
Trussle is gearing up to serve hundreds of mortgages per month with Zoopla. For a traditional mortgage broker, that could require dozens of advisers; for Malhi’s Trussle.com, automation means he aims for just a handful.
However, far from rendering the mortgage advice service redundant, the model splices an experienced mortgage adviser with technical support at every stage from application to completion and beyond to remortgage.
As with a mortgage calculator, a digital customer enters high-level details for either a purchase or remortgage on a laptop, mobile phone or tablet and gets an affordability snapshot in return. An intelligent decision algorithm delves deeper during the fact find to more complex details like whether the borrower is self-employed or had credit problems in the past, for example. Throughout the process, customers know where they are in the timeline while Trussle’s advisers have a dashboard view of the customer’s circumstances, status and suggested product recommendation.
Malhi says: “So the adviser considers affordability, eligibility and suitability. That’s what advice is, a function of those three components. We know which lenders will lend to you, we know how much lenders will lend to you and the suitability is our algorithm mixed with what the adviser’s doing.”
Malhi explains that specialist, complex deals still rely heavily on adviser knowledge on top of the technology to add acumen and a sanity check. At present the system handles vanilla cases well and Malhi says that further development will perfect the company’s ability to push into niches like lending into retirement and the self-employed.
The human touch
So what can’t it do and why is the adviser still key?
“At the moment its two simple things: Judgment and a human voice. We’re talking about large sums of money, the biggest financial and emotional commitment. You can build software that’s as simple as anything and apply the best design, but you may still want to hear that from a voice over the phone.”
A physical adviser is more necessary in cases of ‘escalation and exception, clarifies Malhi.
He adds that 70% of people are logging in outside 9 to 6pm office hours, with some exploring the site at midnight on a Saturday. This is where the automated voice comes in for updates or questions on process.
In a similar vein to the property search, not everyone is looking to buy next month. People are exploring the early stages of a thought process so don’t want to talk to a mortgage adviser yet because they don’t want to waste their time, he adds.
Peter Brodnicki, CEO at MAB says that this is the time-saving element for advisers.
“There is a huge amount of information and documentation gathering before an adviser is in a position to provide advice, which technology can facilitate and simplify, as well as going a long way in narrowing the options available for customer’s individual circumstances.
“Also it is often not possible for advisers to keep in contact with customers considering buying, for what can be many months or even years until they are in a position to proceed and yet you still want to engage with them at the earliest possible opportunity. Technology can again play a major part, by informing clients and keeping them engaged until they are ready to make a decision.”
Brodnicki says he sees technology streamlining and simplifying the process, providing customers with more information and flexibility, and by doing so making the whole intermediary proposition even more compelling than it is today.
“The customer experience and consumer outcomes should be at the centre of all innovation, and if advances in technology can achieve that, then as an industry we should be embracing the changes we will be seeing and ensuring that our businesses keep up with our customer,” he adds.
In part two tomorrow, we find out what the mortgage adviser role looks like in a technology-driven world and how technology could shape the industry in future years
What the MCD means in practice – United Trust Bank
United Trust Bank’s Specialist Mortgage division launched its first product offering – second charge mortgages – in June 2015. The initial launch in June was to a limited number of second charge master brokers which was gradually increased throughout the second half of the year.
In most cases, you might expect this type of project to now be operating at full throttle. However, with a not inconsiderable change taking place in the second charge market place in March, we believed a more prudent approach was called for.
With the Mortgage Credit Directive (MCD), the second charge loan, taken out by many borrowers as an alternative to a car loan or credit card debt, will now be viewed by the regulators as a full blown ‘mortgage’ and will be regulated in precisely the same way.
This is probably the right course of action. Since the credit crunch the second charge market has seen a considerable change. Prior to 2008, the average loan size was around £25,000 and the average actual term was 30 months. People borrowed for short-term consumer finance reasons and compared the cost of their borrowing on that basis i.e. to car finance, credit cards and unsecured loans. I call this the ‘jam jar mentality’ and it makes sense because they cleared these loans quickly without adding to, or substituting, their first mortgage which would have potentially been taken out with a new 25-year term.
The current situation is somewhat different. A new market has appeared of much larger loans for those seeing a second charge as an alternative to a remortgage or a further advance. Interest rates have also moved to reflect the new found status of the second mortgage with rates ranging from as little as 4.70% pa.
So what does the MCD mean in practice? Well unlike first mortgages, under the previous Consumer Credit Act regime the lender did not make an offer to the client, they invited them to take out the loan by signing the Credit Agreement after a consideration period had been completed. The lender then underwrites the loan and, if they decided to do so, issued the funds. Following the introduction of the MCD, the approach will change to the one that is familiar to the mortgage market. The lender issues a binding offer after the loan has been fully packaged and underwritten, and if accepted by the customer, completion will then follow soon after.
The secured loan industry at both broker and lender level, has come together to meet the challenging timeframe set by the European Directive which required the market to complete the MCD change over by 21 March. In view of the importance of the changeover date, the industry worked to an earlier ‘go-live’ date of 15 February and most introduced the new documentation and process on this date.
It has been a tremendous effort on everyone’s part, including the FCA and the Finance & Leasing Association who have sought to clarify the new regulations for a market that simply doesn’t exist in many European countries.
At United Trust Bank we have been developing our online system to allow brokers to complete loan application details and to issue a mortgage illustration, also known as the European Standardised Information Sheet or ESIS. This document, which is in an MCD prescribed format, enables applicants to compare the details of the intended loan with other offerings. After much hard work by many people, the broker portal is now fully functional and MCD compliant.
It’s pleasing to have now cleared the MCD hurdle and we can look forward to developing the bank’s specialised mortgage business both in terms of exploring new product opportunities and building volume. We expect to see considerable change in the marketplace as the effects of MCD work their way through the industry, and you can be sure of hearing more from United Trust Bank over the next year and beyond.
LSL explains the £9.1m Mortgages First acquisition – exclusive
The Colchester-based company offers specialist new home mortgage advice through its subsidiaries, Mortgages First and Insurance First Brokers.
In time, depending on the 2018 audited accounts, LSL’s put and call investments could increase its holding to 100% of the advice business. LSL’s residential development and investments chairman, James McAuley (pictured) unpacks the deal.
“Following our acquisition of Mortgages First Limited (MF), it’s understandable that some may question whether this could be the start of more acquisitions of this kind in the market. For LSL, it’s not something we feel we can predict, and nor would we want to – who knows what other businesses may have planned or have in the pipeline? For us the acquisition of MF simply made sense.
“The fact is we didn’t have a new homes mortgage specialism and yet knew that to remain competitive, we needed one. Our first assumption was that we’d need to develop one ourselves from scratch. This would involve developing systems, processes, employing more staff – some of which we’d have to train – and then roll out the service ourselves. It could have taken years.
“And then an opportunity arose.
“We became aware of MF’s desire to sell and discovered over time that they had already made some headway but, despite this, they still chose to approach LSL – and the rest, as they say, is history.
“We’ve acquired exactly what we were looking to develop ourselves – an established, well respected and fully operational business with a management team that we feel fully confident in and we know will lead the business and maintain LSL’s reputation for providing highly quality customer services. The added benefit being that we could literally ‘hit the ground running’.
“There was also the reassurance from both sides that the same staff could continue to be employed by MF – only now they would benefit from being part of one of the UK’s largest property service providers.
“Overall it’s been a win-win solution for both sides. We knew what we wanted, and MF did too, and we’re both very pleased with the outcome.”
Case study: Moving mortgage networks from Legal and General to Openwork
We have been meeting with Openwork on a fortnightly basis to plan and oversee the transition. They provided us with a dedicated project manager who has great experience in this type and scale of project and his guidance has been hugely important.
To ensure things go as smoothly as possible we are involving all key personnel from the relevant departments within both Just Mortgages and Openwork, including IT, training, finance, compliance and marketing departments. We have working parties in each area holding fortnightly reviews where we update on progress and plan next steps.
One of the most vital areas has been to ensure that all our 130 mortgage brokers get the necessary authorisation by Openwork. Openwork needs to approve each broker in the same way that they would a new recruit so we have been working together to ensure this goes through smoothly. Both Just Mortgages and L&G has always applied very high recruitment standards which has meant we have experienced very few challenges in this.
We will be running a bespoke session for our administrators so they can learn how to use the new Openwork system to progress our pipeline of business. Another session will be run for our compliance team for them to review the system from a sales quality perspective and learn how to use it to check cases against the new business quality standards. The L&G regime we have been working with for the last three years positions us very well for this.
We have designed a training schedule with Openwork which we will initially roll out to our divisional sales directors, followed by a group of our most experienced and successful brokers. Both sets of people will feedback to ensure that the course for the wider population of brokers hits all key messages and is delivered in the most effective way.
The training sessions will be carried out by Openwork but a senior manager from Just Mortgages will also attend every course to answer questions from the Just Mortgages perspective.
Pipeline management has been a key concern for us but L&G has been great, agreeing to provide our brokers with licenses for the L&G point of sale system for three months after we make the move to Openwork. Our administration and management teams will then have access to the L&G system for a further three months. This means that we can continue to manage our pipeline through the existing system so customers will feel no impact from our change of network.
So far we have experienced no worrying challenges and I think this is down to the planning and review processes we have adopted, and the fact we have developed and maintained open dialogue with Openwork, L&G and our respective teams.
Case study: Purchasing a buy to let with a special purpose vehicle
The family comprises both parents and two adult children, all in full-time employment. The parents own a construction company and are both experienced landlords, with a large portfolio of 17 rental properties held in their personal names. Due to the changing tax environment they had decided to make all future buy to let purchases via a limited company and have recently set up a Special Purpose Vehicle with themselves and their children as the four directors.
Commenting on their decision the husband said: “My wife and I have built up a substantial property portfolio over the years and have always purchased property in our personal names. However, the Chancellor’s Summer Budget really made us rethink our buy to let strategy going forward. As higher rate tax payers we knew the proposed restriction to buy to let interest relief would have a huge impact on our finances.
We contacted our accountant who showed us the figures and it became clear that setting up an SPV really was the only way forward if we wanted to continue as property investors.”
The properties and whether to purchase personally or via an SPV
Two five-bed houses in a well-known Southeastern university town to be let to students. Total purchase price £523,000.
With the two properties each yielding a rent of £1,200/month the family had anticipated raising a 75% mortgage (£390,000) at a cost of around 5% pa and making an overall profit after expenses and interest of around £4,500 (before allowing for any potential gain in the value of the property). This all changed in July when the Chancellor decided to restrict deductibility of finance costs for individual BTL investors – starting in April 2017 and with full effect from April 2020.
The impact of the tax changes on individual purchasers of BTL properties paying tax at 40%, and of the decision to buy in an SPV, are shown in the table below:
Thus the family had the intolerable prospect that by 2020/21 their Income Tax bill relating to the rental of these properties could exceed their profit from them. Through using a limited company they have avoided this problem – although there is added complexity and additional tax to be paid in order to take the after tax profit out of the SPV. Each shareholder will have a different situation depending on their other income and in particular the extent of other investment income. However, with the first £5,000 of investment income free of additional tax for each individual, there is the possibility that individual shareholders will not suffer any further Income Tax on this income.
Whilst there were some additional costs incurred these were small in comparison to the potential tax savings. Additional costs included:
- Solicitors fees – for limited company applications both the client and the lender need separate legal representation, so two lots of solicitor’s fees must be paid
- Increased arrangement fees – limited company applications involve more underwriting, so costs are slightly higher
- A guarantee is asked from all directors
The challenge in finding a lender
The deal was quite complex – James Jenkins needed to find a lender for his clients that would accept:
- A newly established SPV limited company
- Clients with a large portfolio (17+ rental properties)
- Clients with multiple sources of income
- Clients with links to developments
Both the clients and James were also hoping for a quick turnaround time as the mortgage adviser explains: “My clients’ situation meant that placing the deal wasn’t going to be a straightforward task. I knew the application was not mainstream and that I would need to use one of the specialist lenders. I researched numerous lenders’ pricing and criteria and decided that in this case, Keystone would be the best fit.
“Keystone is the lending brand of Mortgages for Business and they have a lot of experience of limited company applications for both SPVs and trading businesses. I have a strong relationship with the underwriters and the management team, and their processing is pretty fast. From past experience, I know I can pick up the phone and speak to the specific underwriter working on the case and get answers to important questions that allow me to manage my client’s expectations.
I was right, the team at Keystone rapidly grasped all the technicalities which helped the case progress quickly.”
The application was submitted in December and offered on 15 January. The case is expected to complete within the next month, so that the clients avoid the further expense of a 3% surcharge on Stamp Duty which comes into effect on 1 April 2016.
Subsequent to this application being submitted James has submitted a further application for the same clients to Keystone, which is also due to complete before 1 April.
The client said: “We are so thankful that our broker and accountant were able to send us in the right direction – saving us time and money.”
With thanks to Mortgages for Business.
Case study: How to renegotiate the mortgage during divorce
LEBC Group is doing more work with family lawyers and its clients as part of financial planning around divorce. Kay Ingram, director of individual savings and investments, explains how it helped two clients going through a divorce reach an agreement on a mortgage arrangement.
Tony, 50, and Anna Welbeck, 48, are divorcing; Anna is to remain in the marital home so Tony has agreed to move out. Proceedings have been amicable so far and it has been agreed that Tony is to receive £60,000 representing his share of the equity in the property. In addition to this he has £35,000 in savings.
Tony is employed with a salary of £42,000 and Anna only became self-employed as a hairdresser last year with a net profit of just over £23,000. They approached their existing lender to discuss transferring the mortgage into her sole name with additional lending to release the required equity and a new mortgage for Tony. As Anna does not have a three-year trading history their lender would not consider removing Tony from the mortgage for the existing, modest balance of £30,000. The additional lending she required was a straight decline. They were happy to consider Tony for a new mortgage on his prospective purchase, providing he could demonstrate it was affordable to maintain both properties. They decided to look elsewhere.
Tony approached LEBC for advice to resolve the situation for the couple.
In order to move on, Anna would have to place the mortgage in her name and have the funds to pay Tony so that he could complete on his purchase. LEBC was able to remortgage Anna to a lender prepared to accept one year’s accounts with a projection for the coming year thus releasing Tony from the mortgage liability and leaving him in a position to purchase a new property.
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Case study: Investing in property for a high-net-worth client
This was an issue Steve Straker, managing director of mortgage services at independent financial advisory firm Cartlidge Morland, had to address when he was approached by a client wanting to buy a second property in central London.
Steve’s client was a professional investor and extremely wealthy. He already owned a large family residence in the country and a pied-à-terre in the capital and wanted to buy a second London residence, with a view to eventually using it as his main family home. His plan was to rent out his existing pied-à-terre while retaining his country home for weekend use.
Although Steve’s client generated a substantial income and had a significant investment portfolio, he didn’t want to liquidate his assets in order to fund the purchase of additional property. Steve’s brief was to find a way to use the existing properties as security for a mortgage for the new house in London.
Steve explains the challenge: “This deal was complicated for a lender, both in terms of understanding my client’s income and investments and the desire to have security for a loan split over several properties.”
Alex Ell of Investec who helped complete the deal, says: “This deal perfectly illustrates the issues that many high-net-worth borrowers face. The amount they earn, both in terms of salary and bonuses, can be high but it’s not unusual to find that their money is invested all over the world and is not always readily accessible. Millionaires therefore need mortgages just as much as the rest of us do.”
He adds: “Although the total amount being borrowed was several million pounds, it only represented approximately 1.5 times the borrower’s income. The two London properties offered good quality security and we were therefore happy to construct a bespoke package for the borrower, based on one property being funded with a buy-to-let mortgage and one with a residential loan.
“The applicant also wanted to exchange and complete very quickly and we were able to instruct a valuer and get our own legal team on the case immediately. The deal was approved by credit committee without any issues and we structured the deal so that the borrower could use his substantial bonus payments to pay-down the outstanding capital and benefit from a reducing rate as the capital balance reduced.”
How Enterprise Finance obtained a variety of permissions for the MCD
Since I joined Enterprise Finance at the beginning of 2014, there have been a number of notable milestones from a compliance point of view, both internally and externally. The first item to prepare was on the dissolution of the Office of Fair Trading and the subsequent transfer of regulation of second charge mortgages to the Financial Conduct Authority (FCA). This represented the initial step on the road towards bringing secured loans from the consumer credit regime into the main home loan rules and the European Mortgage Credit Directive (MCD), a journey that will take us through to implementation in March and the new regime beyond that.
Other early compliance projects last year included our acquisition of West One Loans and the subsequent integration of compliance processes that followed.
But it has been the MCD project that has dominated much of our thoughts in the compliance department and we are keen to ensure everything is implemented well in advance of the March 2016 deadline. We took our initial plan to the board at the beginning of 2015, before spending three months preparing and finessing what our final submission to the regulator might look like. Having submitted our application to vary our permissions to the FCA in mid-June, we received confirmation that we had been successful just 11 weeks later at the end of August.
Between now and March, much of our focus will be on getting advisers ready for the new regime through training, testing and roleplaying. As much as you can prepare for the new regime and understand the objectives of the new legislation, it’s only when you walk through the different eventualities that the various issues that may arise come to light, so it’s important that intermediaries consider this in advance.
In compliance the job is never completely finished as there are always new legislative changes to be aware of and cases to learn from. Intermediaries can be rest assured that even once next March’s MCD implementation date has been and gone, we will still be on hand to educate and advise on compliance matters so we can help them support their clients.
Case Study: How equity release helped keep my client in her home
Mrs Rogers was faced with having to repay her interest-only mortgage but couldn’t get further access to finance from her lender because of her age.
I first heard about Mrs Rogers’ situation through an estate agent who had been to value her house, where she had lived for over 38 years. Her interest-only mortgage was coming to an end and she had no means to repay the capital. She thought her only option was to sell up and downsize. Mrs Rogers had booked the valuation with a view to putting her house on the market. However, after chatting with the sales negotiator and explaining that she did not really want to move house, the negotiator thought I may be able to offer an alternative financial option.
I booked an appointment to see Mrs Rogers myself; we discussed the different options available to her such as downsizing as well as equity release. She said she had already considered using equity release beforehand but did not like that interest was added to the loan – she wanted to leave as much of her property as possible to her three children for an inheritance.
I suggested the Interest Choice Plan which is offered by More 2 Life, as I felt it was ideal for someone in her position. The plan gives clients the option of a lifetime mortgage with the flexibility of making monthly interest payments. By being able to service some or all of the interest on the loan, clients can reduce the total amount that will be owed when the house is sold at the end of the loan. Customers are also able to convert their loan to a roll-up lifetime mortgage anytime they wish, free of charge.
Mrs Rogers was delighted with the plan as she could release enough money to ensure a secure financial future and leave an inheritance for her family, which was really important to her.
There should be more innovative products in the equity release market which allow customers to pay down their debt.
Age limits for borrowing are outdated and should be scrapped, lenders should assess on the ability to repay, and age should not be a factor. What shocks me most is that most lenders don’t consider the state pension as an income, however it is one of the steadiest sources of income for older people and it should be taken into consideration when deciding whether they can meet the repayment criteria.
As clients get older and move through retirement, equity release could provide the kind of financial outcome only a lucky few will secure through pension savings alone. There are still hurdles to overcome to convince more clients to consider this option, but the financial benefits for those that do are second to none.