There’s definitely some wisdom in the old motto, “If it ain’t broke, don’t fix it.” After all, why spend time and effort improving something that works adequately well? And it feels like this has been the attitude of most businesses in the mortgage market for a considerable period of time.
But it’s now starting to become clear that for a growing number of existing and would-be borrowers the mortgage market isn’t fit for purpose and as an industry we need to look at alternative approaches to lending.
There have always been groups of borrowers who have struggled to find good deals at mainstream lenders – first-time buyers and the self-employed, for example. And, while there are some great, innovative, specialist lenders out there, who have carved out their own niches – more and more borrowers are now finding themselves defined as non-standard by the industry.
The introduction of RIO mortgages to support later-life lending, the growing options in the shared ownership space and innovations like track-record mortgages are a great start. But what the industry really needs is a more holistic approach to lending that seeks to truly understand the individual and their particular circumstances, rather than trying to squeeze customers into neat little boxes.
Nottingham Building Society has gone through a thorough strategic review to help us understand what mutuality means in the modern world and where we can really have an impact in growing homeownership and supporting borrowers – the very reasons for our foundation over 175 years ago.
As part of the in-depth research carried out during the review, we identified three groups of borrowers who are underserved by the current market:
- Those with complex income,
- Those who have hit bumps in the road, and,
- Those with thin credit files.
What became very clear from our research, was that within these categories there were a large number of challenges and frustrations that borrowers faced in demonstrating they were credit worthy.
Complex incomes often go hand-in-hand with self-employed customers and over recent years we’ve seen a steady increase in this type of applicant – indeed in 2023, there was at least one self-employed applicant on 39% of our residential applications. That’s a big chunk of the population already, but if you also include borrowers who are buying during a difficult, temporary life event, such as a redundancy or divorce (which sit within the bumps in the road category), that pushes the number even higher.
Then factor in those with variable incomes, contractors, newly qualified professionals, those with an imperfect credit file, first-time buyers with low or gifted deposits and it starts to look like a very worrying picture. And while technology and automation are great, we heard hundreds of stories of customers excluded from the market because, “the computer said ‘no’”.
Simply put, as an industry, our outdated systems and approaches currently lead to thousands of customers unable to access a suitable mortgage product.
And the most frustrating part is that in lots of cases it’s fine margins that determine whether an application is successful or not and a simple, common-sense approach would lead to better customer outcomes.
We heard stories, for example, of applications failing affordability checks by £1, multiple cases of mortgages deemed unaffordable even though the applicant was comfortably paying much higher rent and even first-time buyers encouraged to take out car finance to build a healthier credit rating.
What our research also showed, however, was that in many cases, borrowers fell into more than one of these categories. A self-employed, first-time buyer, with a thin credit file, complex income and a couple of recent missed payments, for example, would be looked on unfavourably on a number of points, again emphasising the need for a holistic approach.
While individual criteria enhancements may help an individual in this particular situation, what we really need is a better method to judge creditworthiness and to really understand the person behind the application.
That’s why we believe that to really have a positive impact the alternative approach required from lenders is to truly put the customer at the heart of our businesses. It’s the type of pledge that many organisations from all sectors and industries make but the reality is that in many cases it’s simply empty rhetoric.
For Nottingham Building Society, however, it’s the absolute bedrock that underpins our entire strategy and is the entire focus of the transformation journey we’re currently on. We want to understand our customers in extraordinary depth so that every decision we take is driven for the customer. We will be relentless in our quest to build our understanding of how it feels for customers to interact with the Society, and will use these insights to transform how we do things to drive truly differentiated and personalised experiences customers want to shout about and competitors want to imitate.
It might not be a view shared by all lenders but we believe the mortgage market is broken, as evidenced by the increasing number of borrowers considered ‘non-standard’. We truly believe that by pivoting towards a new specialist residential lending model, we can begin to serve this under-served population.
We’re not there yet though. And we’re never going to be able to revolutionise the industry on our own. So, it really does feel like 2024 should be the year that the whole mortgage market begins to focus more on the alternative approaches needed to ensure we get great outcomes for more customers.
Matt Kingston
Head of National Sales
