Housing affordability, digital disruption and big data are key themes that will continue to underpin mortgage innovation. Christine St Anne reports.
As Australia’s largest asset class, the $1.7 trillion mortgage market has a unique place in the hearts and minds of Australians. Not surprisingly housing affordability is topic that underpins the outlook for the sector.
It is also a theme that will be explored at the RFi Group Australian Mortgage Innovation Summit this month. The summit will reflect on the progress of innovation in the market amid a number of other big challenges such as new investment lending rules, digital disruption and open banking. The event will also look at where innovation might address the needs of a good chunk of the population – first home buyers (FHB).
Deloitte’s latest report on the mortgage sector highlights that FHBs – now representing around 13 per cent of new lending – have historically always found it tough to enter the market. All generations of first homebuyers have had to struggle with starting new careers and juggling growing family commitments. But today’s younger generations face renewed challenges. While loan servicing is not an issue – given the low interest rates - today’s home buyers face steep house prices and stagnant wage growth. Saving for that deposit still poses enormous challenges and tighter investment rules indicate that regulators – and even lenders – don’t have the appetite for 100 per cent LVR lending.
While scaling back negative gearing remains a vexed issue, action has begun on a number of other policy fronts. Federal Government measures addressing housing affordability quietly passed the Senate last year on the same day as legislation allowing for same sex marriage. Under the new measures, people aged 65 and over who downside by selling the family home will be able to make a non-concessional superannuation of to $300,000 into superannuation. Couples can potentially plough up to $600,000 into superannuation. First home buyers can also tap into their superannuation. Any voluntary salary sacrifice contributions into super can be used together with associated earnings for a first home deposit.
CoreLogic CEO Lisa Claes, a keynote speaker at the event, is “heartened” by these new measures but also believes a minister dedicated to the housing sector remains crucial – a measure CoreLogic called for a year ago.
“Allowing retirees to downsize while contributing to their superannuation is a nice way of re-weighting the scales by providing them with an opportunity to monetise an illiquid asset like housing as well as freeing up much needed housing supply to young first home buyers,” she said.
The second initiative - will give a “vital leg up” up to these buyers without comprising the integrity of compulsory superannuation system. She acknowledges that there is no silver bullet to addressing the housing affordability issue but adds that a housing minister will effectively be able to “coordinate and orchestrate” initiatives between the private and public sector – both she believes have a role to play in helping devise a solution to housing affordability.
With parents 'shadow funding' their children to buy their first property, Claes added that there is an opportunity to develop products that could cater to this segment and find a ‘middle ground’ – somewhere between requiring parents to be a full guarantor and, at the other end of the spectrum, gifting their children the deposit.
Importantly she adds that there is a role for the banks to provide more product innovation in the sector, identifying examples such as shared equity schemes. Bank Australia offers a shared equity arrangement through a partnership with the South Australian Government’s initiative HomeStart Finance and Adelaide City Council. However, eligibility is restricted to borrowers with limited income. Similar schemes are being eyed by state governments. Claes notes that these products have been on the periphery of lenders’ product pipeline and could be now considered.
“As an ex-banker, I understand that you have to navigate the prudential and regulatory landscape. Higher risks spells higher capital requirements and this of course puts pressure on return on equity and subsequently interest rates. There could be some unintended consequences,” Claes said. Despite these challenges; she is “surprised that we are not seeing more product innovation in this area. We know that the appetite is burning for innovation in that space”. And the demand and desire for such a solution is certainly there according to recent findings from RFi Group.
We know that housing affordability is a significant issue for some Australians, the bank is looking at a number of innovative solutions that could help unlock opportunities for young Australians to enter the property market, Meg Bonighton, NAB
A two-headed demon
The research conducted with consumers of all ages asked what their top three financial goals were. Assessing the responses by generation (Table 1) shows how mortgage product innovation can help achieve the desired goals. For example, the primary financial goal for one-in-two Millennials - aged 18 – 34 – is to own their own home. However, high house prices are making it harder for this group to achieve this goal, further evidenced by the aging profile of FHB in Australia. RFi Group research revealed that in the 1970s, the average age of a FHB was about 22 years, whereas in the 2010s, the average FHB is almost ten years older.
So what is the solution? Australian banks are also grappling with product innovation around housing affordability. “We know that housing affordability is a significant issue for some Australians, and National Australia Bank is looking at a number of innovative solutions that could help unlock opportunities for young Australians to enter the property market,” NAB general manager for home lending Meg Bonighton said.
NAB sees a role for older family generations to play in helping young people enter the market. The NAB Family Guarantee allows any family member – not just parents but even aunties and uncles - to use a portion of the equity in their home to provide extra security for a child’s loan. This helps reduce the loan-to-value ratio which in can help avoid the payment of Lenders Mortgage Insurance which is applicable if a 20 per cent deposit of the house price cannot be met.
Bonighton who is also speaker at the event, said that family guarantees mean that “family members can support their loved ones and provide that little bit of extra support to get them started on their home ownership journey”.
Under the NAB Family Guarantee, a family member can either use equity in their property, or money placed in a term deposit account, as security to support a fellow family member.
With the latter, the family member will earn interest on the money placed in a term deposit.
“The NAB Family Guarantee is a good option that can help young Australians buy their first homes and parents can earn interest while supporting their child’s home ownership journey,” she said.
The other big banks including Westpac, ANZ and the Commonwealth Bank as well as St George, Greater Bank and Bank of Melbourne offer similar mortgage products that recognise the important role family can play in helping people get into the property market.
CBA has a Future Home Saver Product, a savings account which offers bonus interest for savers if they end up taking out a CBA loan down the track.
A Westpac spokeswoman highlighted a recent first home buyer survey conducted by the bank which showed that nearly one-in-five FHBs plan to use help from family or friends to support their main funding method to buy a home.
“We know that families can play a vital role in supporting FHBs to get a foot on the property ladder,” she said. “We have policies available under all of our standard home loans that allow parents to contribute equity to help children into home ownership. We are also committed to supporting families through this process and do this through our Parental Guarantee.”
RFi Group managing director Alan Shields says that banks could tap into the experiences of the maturing shared economy by offering shared-equity products –an idea alluded to earlier by Claes. It’s a concept already developed by UK bank Barclays, which has launched a product that enables FHBs to share the purchase with the bank, paying rent on the unowned portion. “The concept of sharing fits well within the shared economy of the future and sits comfortably alongside our share cars and our Airbnb holidays,” Shields said.
At the same time as FHBs are accessing the market, baby boomers are facing a retirement savings gap of $500,000 while also sitting on a wealth of property. Indeed Table 1 also highlights that the top two goals of this generation are to keep their current lifestyle as well as ensure a comfortable retirement. Shields describes this conundrum as a ‘two headed demon’ and echoes a solution that could address these twin demons by the ‘Godfather of Fintech’ Rob Suber.
The concept of [equity] sharing fits well within the shared economy of the future and sits comfortably alongside our share cars and our Airbnb holidays, Alan Shields, RFi Group
As noted earlier, the government has moved to encourage baby boomers to downside by offering superannuation concessions to boost their savings but Suber’s solution takes it further by encouraging baby boomers to sell a share in their property instead of baby boomers having to borrow against their property. Millennials may be interested in getting a foot on the ladder by investing in pooled properties of older generations even if they can’t move in.
A UK RFi Group report found that some financial institutions have adopted innovative approaches to their intergenerational support products, with some relying on releasing equity built up in an existing family home. For example, Harborough Building Society is one such lender, allowing parents to take out a second mortgage on any of their properties if they have a sizeable equity stake in their home.
St. James’s Place and Metro Bank released an intergenerational mortgage range in 2016 allowing parents and grandparents to support first home purchases through a number of means including gifting money to raise deposits, providing extra mortgage security and allowing more than one person to apply for the mortgage. RFi Group’s Shields sees ample opportunity for innovation in the sector is eager to see how the industry will respond.
Digital disruption remains one of the most talked about aspects of mortgage innovation as evidenced by a number of online mortgage platforms emerging in the space - think HashChing, LoanDolphin and uno Home Loans. In fact the summit will include a panel of speakers that will discuss the themes around digital mortgage offerings and how these businesses are poised to grow further in the market.
It seems like many people are moving to these digital platforms to realize their property dream. According to RFi Group, while face-to-face channels remains important for complex tasks such as mortgage applications, the appetite for online mortgages is building.
The research found FHBs applied through digital mortgage platforms because it allowed them to easily compare loan products across different lenders as well as got them the best price for a home loan.
Last year, uno Home Loans grew by 600 per cent and this momentum is expected to continue, according to CEO Vincent Turner. The business hired 27 people in 2017, and Turner plans to double the firm’s head count – currently 50 – by the middle of next year. “We are ready to knock a hole in the wall to build another office as we continue to grow,” he said.
Its $5 million extra funding from Westpac in October 2017, demonstrates the bank’s continued commitment to the online platform. This year, Turner plans to announce “two to three initiatives” to further improve the business. “Watch this space,” he says.
Although online mortgage platforms are positioned for the self-directed consumer, he also understands that consumers also want support from staff. However, for Turner, this does not necessarily have to equate to face-to-face support, rather it’s about a quality customer experience. “It’s about helping people source a loan that suits them by providing them with insights using technology and data,” he said.
Digital offerings are often associated with Millennials but uno has attracted a certain “blend of consumer”. “We have basically grown from a non-existent sector to an industry that is maturing. Our customers are blend of people across all age groups. They are from regional towns to cities and aged anywhere from 31 to 61,” he said.
In fact, at the time of the interview, Turner’s team had just signed on a 55-year-old mechanic from Bourke in Western Australia. “Our customers have an appreciation that technology can enable them to get a better service and offering,’ he said.
Non-banks also have a role to play in securing the mortgage dream for many Australians particularly the self-employed, contractors and business owners. While affordability issues are restricting FHBs to accessing the housing market, the self-employed also confront difficulties. This group has traditionally found it difficult to access home loans from the big banks given their credit history, which does not include regular pay slips.
“The banks tend to focus on the PAYG customer. Contractors and self-employed operate in a more complex environment. Our expertise is in understanding risk and pricing for it,” Resimac joint CEO Mary Ploughman said. “We are able to achieve this with our products. Meeting the needs of this market lends itself to innovation,” she said.
Indeed, Resimac which uses securitisation to fund its loans, was the first issuer of residential mortgage backed securities in Australia back in 1998 and given the GFC, certainly has the track record in providing non-conforming home loans.
Ploughman also recognises the benefits that digital innovation brings in helping people secure a home loan. Its business State Custodians provides Resimac with the ability to provide an online direct consumer channel. “Around 10 to 15 per cent of mortgage origination comes from this channel but we do expect market share to grow more through the online space,” she said.
Knowing the customer
Going forward mortgage innovation is set for a shake up in a brave new world of open data. Already CoreLogic’s Claes sees a role for big data in providing banks with innovative ways to access growth. The business can provide banks with access to information on emerging “hot spots” across Australia. Through its costing data sets, CoreLogic can now offer data to enable banks and home owners acquire a better understanding of the value of their home following a renovation. If home owners are considering a renovation, data can be used to assess what the value of the improved home will be following such an investment. “This equips customers and the banks to better manage their financial outcomes, specifically when making those critical stay or hold decisions.”
Claes also believes an open data world will empower consumers to search for the best mortgage offers making them more “slippery”. “Knowledge is power. Data will lead customers to becoming more empowered in terms of their decision making. They will be able to shop around for an offering that is right for them. Open data will be a big win for customers,” she said.
Similarly, RFi Group’s Shields sees ample opportunity under the new framework particularly around comprehensive credit reporting. Together with innovations such as chat bots and natural language, he believes the sector will evolve to allow lenders to pre-populate loan application forms and offer tailored loans based on consumer data.
However, uno’s Turner warns that the framework carries some level of risk. For example, lenders would be able to access a wide range of consumer data including a person’s spending patterns. “While it’s a common belief that a person modifies their spending once they take on a mortgage, this spending history could be the focus in the loan application process,” he said. Lenders could then be discouraged if they believe that the spending pattern does not meet the mortgage repayments, scuttling their dream of home ownership.