Building the mortgage market of tomorrow

Introduction

It’s a pleasure to be here celebrating the Mortgage Club’s 30th anniversary. In truth, I came here today with a little trepidation.  

Not because I might have had to go through a rigorous affordability assessment just to get through the door!   

But rather because it is fair to say that, as we started our Mortgage Rule Review this year, some reforms have not been met with universal approval among brokers.   

This is, after all, a market which is serving millions of customers well. 

Lenders and brokers rose to the challenge through the pandemic, rising costs of living, and rapid increases in interest rates.  

Arrears and repossessions remain historically low[1].

Thousands of consumers receive mortgage advice daily. 

Despite elevated housing prices, first time buyer numbers have held up.  

With over 7,000 products on the market – a near record – the market looks healthy. Sustainable.

But our Review is not solely focussed on the current market. 

We want to enable the mortgage market of the future – one that adapts to fast changing technology, employment and demographic shifts, and consumer preference, need and expectations, particularly in their later years.  

A market that supports the financial wellbeing of millions throughout their lives, with more people accessing sustainable homeownership. 

Our response must be bold.  

Focussed on outcomes, not orthodoxy.  

So we have asked - who is locked out of homeownership, why and for how long?  

What does this mean for those households and their financial resilience?  

Do we need to reevaluate the trade-offs of, at least partial homeownership, against the alternative of renting into retirement, and the additional pension saving it requires?  

Can some of the nation’s £9 trillion of housing wealth be unlocked more effectively, and put to more productive use, particularly to sustain living standards in later life? 

What can we learn from others around the world who have tried new ideas? 

We need to begin answering those questions today – to deliver the market of tomorrow.

Action so far

A team member recently confessed he spent Sunday mornings as a child combing the Sunday Times property section imagining the homes he’d live in when he grew up.  

Had he been able to buy then – at the time of the Mortgage Club’s creation – the average UK home would have cost just over £65,000, or 2.8 times the nation’s median income[2].  

Today, the average home costs just shy of £300,000[3] – a record high.  

That reality – alongside falling interest rates and the market’s prevailing approach to stress testing – compelled us to act in March.  

We clarified that alternate approaches could meet our requirements, and so opened affordable mortgages and homeownership to thousands more.  

Lenders responded quickly – 85% of the market has updated its approach, able to offer around £30,000 more. The volumes of mortgage approvals have remained robust, with more than 65,000 approvals for home purchases[4] in September – the highest figure since December of last year. 

Savills estimates[5] that these changes alone could increase first-time buyer transactions by up to 24% over the next five years. 

And in July, the Financial Policy Committee, of which I am a member, took complementary action with the PRA and FCA, updating its recommendation on high loan-to-income lending. Supporting up to 36,000 more first-time buyers a year.  

Seeing the full impact in completed sales will take time, but lenders report good pipelines, with many adjusting criteria to support lower income households.  

Zoopla reports[6] that 350,000 homes are progressing through the sales pipeline - the largest in four years. 

Some warn this will lead to excess credit, inflating house prices.  

But neither of these changes do that.  

Instead, they enable lenders to undertake more realistic, robust affordability assessments. 

And while house prices are up modestly in nominal terms, there are regional variations and we aren’t seeing runaway real terms price increases – with several forecasts being revised down.   

Nor are we an outlier – Canada, Ireland, Australia, New Zealand and Norway have all made recent changes to meet affordability challenges.

Underserved

But we aren’t stopping there. 

Some structural challenges remain.  

Feedback to our recent Discussion Paper highlighted that if you cannot raise a large deposit; do not have familial support; are self-employed; have irregular income; are recovering from a negative life event; have overseas assets and income; or have dealt with minor credit impairments – you are likely to find it more difficult or expensive to get a mortgage. 

You will all have your own clients for whom it has been unnecessarily difficult.  

Some of these groups are growing – and there is nothing unusual about them. 

Without change, more are likely to rent for longer – with the proportion of people renting in retirement potentially more than doubling by 2041[7], perhaps requiring almost £400,000 more in savings than for those who own a home[8]. 

The market and regulation needs to serve them better. 

We don’t have all the answers – but we want to give firms more options. 

Take interest-only.  

Seen through the prism of overextension prior to the financial crisis, it should not be the mass market product that it used to be.  

Indeed, sales of any form of interest-only loan to first-time buyers are currently close to zero. 

But with strong product design, quality advice, effective communication, and support through the life of the loan, could part interest-only support earlier homeownership?  

Similarly, low-start lending. Perhaps beginning with only interest serviced, could it help those with strong future prospects?  

And as I raised previously – should some have the option to deploy pension savings to enable homeownership? Or as some have proposed, a ‘Citizen’s Advance’[9] on the state pension? 

While each would introduce new risks – we need to debate some bold shifts to meet the challenges we face.

Innovation

Innovation and smarter use of data also have a crucial role to play in widening access. 

Just last week Experian expanded its use of rental payments[10] in its revised Credit Score. 

One fintech lender boosted approvals[11] for self-employed applicants by 20% using real-time account data. 

In the US, Upstart has been using machine learning to look beyond credit file data and using over 1,600 data points[12] – many of which are non-traditional – in their underwriting process for those with limited credit scores since 2014.

OpenFinance and AI will transform the mortgage market.  

We are supporting mortgage firms through our AI sandbox, and, starting next week – our 3-month Mortgage TechSprint.

Enhanced later life lending

Looking ahead, people are carrying mortgage debt for longer.  

Some may never own their homes outright – but they will have the benefits and security of homeownership all the same.  

43% of people are projected[13] to be under saving for retirement – and this assumes a high rate of homeownership. 

How will households meet retirement goals, needs and potential care costs?  

The mortgage market should be on hand to unlock wealth at the right time – when it’s needed, offering fair value, as part of a wider financial plan. Not as a last resort.

The shadow of legacy issues in the 90s may still shape some consumers’ – and advisers’ – perceptions of equity release. And we recently found[14] that advice and promotion standards still needed to improve.  

But lifetime products continue to evolve. More flexible retirement and lifetime mortgages are already supporting some consumers. More could benefit.   

Advice and support will be vital to help consumers navigate options.  

But across pensions, investments, and mortgages advice is often siloed. Even mortgage advice is split between mainstream and equity release specialists. 

This can leave consumers – who typically have just a few interactions with any one of these sectors in their lifetime – to make critical, one-off decisions, unaware of all their options. 

Feedback to our Discussion Paper shows clear motivation to take a more effective, streamlined approach.  

Should all mortgage advisers be able to advise on lifetime products? 

Would a market-wide referral scheme make the difference?  

Or reflecting housing wealth options in Pension Wise?  

Or do we need something more radical?  

We've shown we can think radically on investment advice with targeted support. Could we be similarly creative about how we help homeowners begin to consider how they might draw on their housing wealth more easily later in life? 

Further thought and engagement is needed, but the aim is clear: an industry supporting consumers to fully understand their options for funding later life, receiving timely and appropriate support and advice, with products that deliver positive outcomes, offering fair value.

The whole system needs to move together

Regulation can only do so much.  

True reform needs commitment across the whole system.  

I commend Santander for their recent report on the homebuying process, showing that over half a million property transactions in England and Wales fall through each year. Leaving an average bill of £1,240 and costing the economy £1.5 billion. 

Simplifying and digitalising our century old, paper-based and uncertain home buying process, could unlock productivity gains, and save significant personal costs and stress.  

Australia, Canada and Scandinavia show what is possible. 

We welcome the Government’s consultation on proposals to improve the home buying and selling process[15].  

We support the ambition to streamline AML checks. Digital identity could make a big difference here. 

And when we assume the role of the single professional services supervisor for AML, we will be able to build further insights into the consumer experience and ways it could be simpler.  

In that vein of coherence and joint endeavour I would also highlight, again, that, in our view, the Mortgage Charter – introduced at pace to deal with a short-term challenge – can now be safely retired.   

Doing so would not impede consumer protection – but would remove overlapping standards and reporting requirements.

Conclusion

We have been grappling with these issues – affordability, an ageing society, and the future of the market – for the better part of a decade[16].

So, shaping a new mortgage market for the future will be no small feat.  

It requires all of us – consumers, industry, regulators and government – to think differently.  

Ensuring we have a market that provides consumers fair value, high quality advice and support is crucial.  

But true reform must be systemwide.   

We’ve shown we’re up for it.  

The Mortgage Club, throughout its history, has shown it can lead change.  

It’s time for others to join us.