Backdrop
A fall in the pound and the expectation of a sharp interest rate hike have resulted in a number of lenders temporarily halting mortgage offers to new borrowers, while other providers are increasing rates on a number of fixed mortgages.
Economists expect to see interest rates more than double to 5.8% by April 2023 from current levels of 2.25%. This is 1.8% higher than the originally anticipated rate of 4%.
Only a year ago, mortgage providers were battling to attract borrowers and it was possible to lock in fixed rates of less than 1% for 2-5 years. Now, even the most competitive lenders are only offering fixed-rate mortgages to those with large deposits, with prices still reaching 4.5%. First-time buyers are expected to be hit the hardest and could struggle to get a mortgage on affordability grounds, with a number of lenders pulling out.
But what does this mean for homeowners and potential buyers?
For homeowners: The hit to UK households won’t be immediate, with the majority of borrowers now locked into 2-5 year deals. According to the Financial Conduct Authority (FCA), about 74% of mortgages (6.3m) are on a fixed rate, with some homeowners who are lucky to have lengthy remaining terms protected against hikes for the time being. But 600,000 fixed-rate mortgages are due to expire by the end of this year, with a further 1.8 million expiring in 2023. Pantheon Macroeconomics predicts that the average household refinancing of a two-year deal will be looking at a monthly repayment surge of 70% from £863 to £1490.
Source: BBC news
Buyers: Young, first-time buyers may now have to prove that they can afford up to a 7% interest rate hike as a record number of lenders pull out. Those that were looking to move soon may want to reconsider as it’s predicted that prices could fall by as much as 20%.
Renters: Renters aren’t safe from the market chaos, either. It’s predicted that landlords could pass on rising mortgage costs to renters. This, with the cost of living crisis, is leading to panic across the market.
Could open banking help?
Having been around for just four years, open banking is a relatively new innovation. But, it’s proved to be invaluable in helping consumers and businesses to take control of their finances by sharing financial information that was previously only available to banks.
Consumers and businesses can now choose third-party providers (TPPs) like budgeting apps, lenders, and personal finance management platforms rather than relying solely on the bank to do what’s best for them. This opening up of data supports consumers and businesses by providing them with enhanced insights and access to fairer financial services that are tailored to their specific needs that enable them to make better-informed decisions. Data enrichment could be the answer
Account Information Service Providers (AISPs) are one type of TPP that - with consent - collect financial information like account details, balances, and transaction information from banks. An example of an AISP is Credit Kudos who provide businesses with financial information insights to help them make better and more informed lending decisions. With the use of data enrichment they can take this data and refine it to provide actionable insights. Yapily provides data enrichment to give a full picture of spending habits, predict balances, identify recurring transactions and better understand affordability.
How open banking can help buyers provide access to accurate affordability scores
Data enrichment gives lenders access to a more sympathetic overview of potential buyers. For example: let’s say you had a large, one-off transaction on your statement. Data enrichment would automatically recognise this as a one-off rather than a recurring transaction. The result? Boosted affordability scores.
Rather than looking at a snapshot of your spending, which may include an unusually large payment or change of employment, open banking offers lenders the chance to make informed decisions based on a more accurate view of your finances. Bonus: open banking ensures banks aren’t limited to their own financial data. Instead, they can view data across all accounts, strengthening the borrower’s ability to demonstrate creditworthiness compared to outdated scoring systems.
In the past (and before looking to access credit like a large loan or mortgage), consumers may have been extremely conscious about avoiding one-off bills or changes of circumstances. Now, with open banking, the data shows a more sympathetic overview. This is particularly useful when trying to negotiate mortgages before another hike, as banks are more likely to lend to those who can clearly demonstrate they can afford increases.
Understanding affordability
Affordability is key for lenders. But, when only considering income or a small snapshot of a potential borrower’s financial history, it can be difficult to properly understand real affordability.
Open banking enables lenders to analyse financial data for up to two years, providing a clear and accurate affordability profile. This is particularly relevant for first-time buyers who have to prove that they’ll be able to meet mortgage repayments, even if interest rates hit 7%. This also protects borrowers from default, ensuring they are only lent what they can afford rather than an amount based solely on income.
Proactive conversations to support borrowers and avoid default
With open banking, access to data is automated. Consumers are just required to re-consent to the connection every 180 days. This seamless flow of data enables mortgage providers to see when large, unexpected bills are paid and understand how affordability changes over time. Equally, if there is a boost in income, this will increase lender confidence.
The benefit for both lenders and borrowers is that parameters can be set up to trigger alerts that can lead to proactive discussions, rather than waiting for borrowers to fall behind on their payments before taking action. This is particularly important for lenders on a variable rate mortgage who may struggle to meet increasing payments. Lenders can champion their customers, and provide assistance or recommend financial products that can offer support when needed.
Technology to support landlords in navigating an uncertain landscape
Banks can utilise open banking to ensure they’re lending sustainably across all accounts. Beyond this, there are also other solutions on the market to support landlords as they navigate their way through this period of uncertainty.
Arthur, for example, is an award-winning property management software platform. Yapily enables them to digitise the tenancy journey and reduce the manual headache of rent payment reconciliation through open banking. The lettings sector is notoriously slow at reacting to changes in consumer behaviour, which now more than ever poses a risk.
Arthur brings everything to one easy-to-use platform, simplifying operational processes to establish a fully integrated infrastructure around which businesses can improve their service offering and scale sustainably. Property managers can confidently manage and streamline their business’ financial management with Arthur’s powerful financial module, combined with an integrated live bank feed, and intuitive reporting functionality powered by Yapily Data, to ensure that their operation can swiftly generate the data and actionable insight they need.
To recap…
Both lenders and borrowers will benefit from access to data insights and a proactive approach to managing consumer relations. Open banking can’t solve the uncertainty around soaring interest rates, but it can help provide clarity on other aspects such as affordability.
… for lenders
The cost of lending is increasing, which in turn reduces the appetite for risk. Banks will be more careful of who they lend to, and may require upfront fees or higher deposits to offer fixed-rate mortgages.
Open banking data helps lenders find the best deal for consumers while building a clear financial profile and understanding creditworthiness based on real-time up-to-date data. Lenders will benefit from making more informed decisions that are no longer based on a limited snapshot, providing confidence in who they are doing business with.
… for borrowers
It’s a tough market for borrowers. With bills increasing across the board, there’s significant pressure on consumers to meet their financial obligations.
Open banking empowers consumers to own their financial data and gain access to the support they need. Personal finance management tools like Emma, allow consumers to connect their accounts and gain actionable insights including where they may be overspending on certain bills. By demonstrating positive financial behaviour, consumers are more likely to have access to better rates when searching for a new mortgage or renegotiating an existing agreement.
