When the Open Banking was launched in 2018, it was considered a “revolution”, a portal to smarter, more personalized products and services. Expectations are high.
But a few years have passed and it is at best overwhelmed.
The transformation of this technology promise is fragmented, especially in smaller companies, many of which lack the infrastructure or appetite needed to leverage the rules.
As a result, open banking is a cautionary tale that itself relaxes regulation and does not guarantee progress.
This is a course worth remembering because the FCA believes that one of the largest reshuffles of mortgage regulation since the 2014 mortgage market review.
The magazine has already covered DP25/2 in depth, so I won’t go into the details. However, this shows a willingness to cater to a new era of flexibility in assessing affordability and applicability.
Although detailed, this article clearly shows that the FCA wants to make it easier for people to obtain mortgages. But, like open banking, regulatory reforms do not move needles separately. The lender needs to meet halfway through.
This is a common sentiment at our recent roundtable for the future of the Mortgage Market at Communications Consultancy MRM, where participants spoke in detail about the need for truly innovative products and more flexible underwriting to address the affordable crisis.
Although how this is achieved is different, one idea that stands out is the concept of intergenerational mortgages, which emerged in Japan in the 1990s, in response to soaring house prices and slow wage growth. Does it sound familiar?
These loans allow borrowers to obtain loans for 50 years or more and hand over the debt to their children. With long-term extended loans, repayments have become more affordable, helping younger buyers get into the housing ladder earlier.
Of course, it is unlikely that the UK will accept this model. In Japan, the concept of “family residence” is more embedded – usually property persists in the family.
This is not the case in the UK. Here, many people may consider inherited debts as financial burdens that they are not registered.
But, outside of this, whether intergenerational mortgages become things. The broader argument made by participants is that lenders need to innovate and think differently (even fundamentally) to deal with affordability challenges.
In recent years, we have seen some product evolutions, such as long-term fixed-rate transactions that add real value to brokers’ toolkits. But they are still relatively good niches, and it’s hard to say they represent real innovation.
Skipton’s “Trail Record” mortgage is 100% used for LTV loans as affordable – another popular addition.
Before that? You may argue that offsets that guarantee mortgages are truly innovative products. You can also provide reasons for sharing ownership.
But in recent years, overall innovation has basically existed.
Granted, regulations have long been the brakes on product development and risk appetite. But DP25/2 shows that regulators are now willing to ease some of these constraints.
This creates an opportunity – there is a feeling that the industry cannot waste it.
This is important because the market has changed. According to the National Office for Statistics, affordability has deteriorated dramatically over the past two decades, with the average salary of average property in England being more than 7.7 times the average salary, up from 4.2 times the beginning of this century.
At the same time, the nature of the work has also developed. Freelancers, gig workers and side workers are now common, with traditional career paths becoming increasingly fragmented and nonlinear.
The retirement age is also climbing. Recently, Labour announced a review of the national pension age. For young borrowers, jobs entering the 70s are likely to become the norm.
Despite these shifts, lending standards have been in trouble in the past. This disconnect is one of the strongest topics in our roundtable. Participants agreed that lenders remain too stiff and slow to adapt to the reality of today’s labor and housing markets.
The FCA paper hints at a more flexible future, an opportunity to transcend rigidity “not saying”.
But whether this happens depends on the lender’s willingness to take action. Opportunities exist – but so are the risks of doing nothing.
Of course, separate regulation and lender innovations cannot solve the housing crisis. Without increasing housing supply, relaxed affordability rules will understafford the house.
But that’s the control of external lenders. What they control is how they deal with the opportunities in front of them.
If they are too cautious, DP25/2, and potential new rules emerging from it may join open banking, this is another situation of wasting potential.
Regulators are laying the foundation. Lender, this is over for you.
Paul Thomas is MRM’s Head of News and Content
