It may be the World Cup year but I’ve got a feeling the second most popular spectator sport this Summer, among brokers and packagers at least, will be the well publicised arrival of several new entrants into the UK mortgage market.
“The fact that we have so many recent and potential entrants into the marketplace means that competition in the sector is at an all-time high,” says Shaun Vickery of The Select Partnership. “Increased competition is indicative of a healthy mortgage market and ultimately of huge benefit to the consumer.”
The new entrants will compete against each other and the established players will react strongly to try and protect their market share. What form will this competitive activity take? Initially the battleground will be on price. As Shaun Vickery observes, “Foreign banks are clearly seeing sufficient margins in the UK mortgage market to justify their appearance, especially given that they are likely to have to price themselves more competitively than the already established lenders and/or find new niches to attract custom.”
The established players will probably make a pre-emptive strike with product interest rate reductions of their own, if only because price-cutting is a quick fix that can be implemented with ease. Changing criteria is inevitably a slower, less flexible process as it involves the approval of credit committees.
Longer-term, the rock-bottom pricing of products is unlikely to be sustainable. Nor indeed would it be in the best interests of the parties involved. Lenders need margins to invest in the best people to deliver quality services, to keep their technology at the cutting edge and, of course, to remunerate those in the distribution chain who are so important to the future of the industry. However, it’s unlikely that rates for buy-to-let, non-conforming and self-certification will ever creep back to their previous levels. The era of many niche products priced almost as keenly as mainstream products has begun, and increased competition will only serve to strengthen that trend.
New thinking
The real key to success for lenders – newcomers and existing players alike – will be to think in new ways; looking for improvements, looking for the all important gaps.
“We’ll be expecting newcomers in the market to bring real energy and imagination,” says Les Daley of Pinnacle Mortgage Funding. “They’ll need to stir things up a little and find new ways to support their distribution channels, including the development of product features or even whole new products that aren’t currently available. Ours is a two-way street – if mortgage lenders innovate, they can expect our help to drive the good news through to consumers.”
Brokers and packagers have always been problem solvers for non-conforming clients. The lender who can help them place more business for more customers through a combination of attractive products and great service will inevitably edge ahead of the competition. In that situation, price won’t be the key driver. Of course the rate has to be ‘thereabouts’, but ultimately it’s not everything. Experience has shown that if a lender has a so-so product and so-so service, a low price normally won’t stop brokers voting with their feet.
Three areas of innovation
Innovation in the new-look mortgage marketplace will happen in three main areas: product, service and technology.
Beginning with product, where will the new ideas come from? In the foreseeable future it’s reasonable to expect evolution rather than revolution as proven niche products are tweaked and stretched to satisfy more and more mortgage customer needs – a higher loan-to-value on this self-cert product, for example, or a more flexible view on CCJs for that non-conforming product.
Moving on into the area of service, it may be a case not so much of creating ideas as re-establishing them. Technology, as we’ll come to in a moment, is vitally important but it will never replace the human factor. Once again, lenders who remember the importance of simple human contact will give themselves the edge. Nowhere is this more important in the non-conforming marketplace than with a new lender’s underwriters, who will need an intuitive flexibility that computerised systems will probably never have. Great underwriters have a rare combination of flair, experience and real-world attitude.
All of this, of course means that the new lender entering the marketplace must hit the ground running with a well-trained, experienced and motivated team who know what intermediaries really expect of them. Actually attracting this ‘wish list’ team is easier said than done – and the blunt fact is that there aren’t enough good people around to fill the offices of all the new lenders who will be coming into the marketplace. Inevitably some entrants will be handicapped on the service front for that reason.
The best of the best
How does a new lender attract the best people? There’s no magic formula, but offering them an outstanding career opportunity is a pretty good starting point. How a potential staff member perceives a new lender is largely influenced by the way the business is being set up. Some foreign investment banks have chosen to enter the market by acquiring existing lender brands. This is a perfectly valid model but it does mean you can also acquire the baggage and legacy thinking of those particular brands.
The other way to enter the market, as Deutsche Bank has chosen to do, is to invest in a completely new brand, back it and allow it to grow organically. In this scenario you’re not trying to change an ethos, you’re establishing a whole new one. This provides a ‘green field site’ for talent and an opportunity to be in at the beginning of a new venture. We know from the interviewing we’ve done that this is a powerful magnet for high calibre people at every single level of the organisation.
The stature of the business that backs a new lender will also influence staff in their career move. In the case of db Mortgages, our parent bank has 1,600 branches worldwide with 831 of them in Germany.
Where a lender chooses to locate its UK offices is another important factor. Open your doors in an established financial services centre and you have a pool of experienced people literally on your doorstep. If a lender has to cast their recruitment net wider, they could have problems.
In short, the more attractive the job proposition a lender is offering, the higher the standards of day-to-day people-based service that packagers and brokers can subsequently expect from them.
Then there’s the final piece of the jigsaw: technology. To outsource systems or develop them in-house is a debate in itself, so suffice to say that outsourcing has a lot going for it. In the case of db mortgages it means a partnership with worldwide technology provider Vertex Mortgage Solutions. This organisation is part of United Utilities and has since spread its expertise across a huge range of industries including mortgages – its systems already administer 65,000 accounts for smaller lenders. In this case we even have the outsourced partner team under our own roof, operating a bespoke system designed for our distributors’ needs, and helping us deliver complimentary services such as high speed document scanning and overnight application processing. This means the systems people do what they’re good at, and we concentrate on what we’re good at.
The internet is a still an under-utilised tool in the mortgage industry and it’s up to incoming lenders to show the way forward with more dynamic, interactive and supportive offerings. They need to have their web development teams out there in the marketplace right now, discussing with intermediaries what they want (and don’t want) from next-generation websites.
If they get their technology right then lenders can increase the quality of their service while reducing their costs, which should follow through into even better value products for mortgage customers, together with fairly rewarded intermediaries.
So, by introducing new mortgage product ideas, the latest technology and strong service, the newcomers should be good news for the marketplace. And of all the hopeful entrants, who will be the winners and losers? Like the World Cup, we’ll just have to sit on the edge of our seats and see.
