Are digital mortgages a threat to brokers?

Digital mortgages are fully automated, so borrowers can receive a pre-approval in minutes.

Traditionally, most loans have required manual intervention, unlike digital mortgages, which provide an end-to-end, “humanless” and paperless experience.

Now available in Australia, digital mortgages have been dubbed the “future of lending”, prompting MPA to ask whether digital mortgages pose a threat to the personalised service provided by brokers.

Financial software provider Sandstone Technology has been in operation for nearly 26 years, providing “all things digital banking” with customers in Australia, New Zealand, Asia and the United Kingdom.

Sandstone Technology CEO Michael Phillipou (pictured) said demand for digital mortgages has “sped up” over recent years.

Referring to US-based Rocket Mortgage (formerly known as Quicken Loans LLC), which set up more than a decade ago, Phillipou said the company had quickly gained traction, capturing market share.

Based on other markets – which Australia invariably learned from – banks, financial institutions and other lenders have become increasingly interested in having digital mortgage capability, Phillipou said.

“What we have seen [is] there are a few players in the direct-to-consumer market who are doing good things and have drawn some attention over recent times,” Phillipou said.

Read more: Digital lenders point to the importance of humans in the mortgage experience

In addition to Sandstone Technology, he said there were a few technology players within Australia who could provide financial institutions with a true end-to-end digital service, providing pre-approvals “in minutes” and full approvals in certain circumstances in “under a day”.

“That’s where the market is, which is a big move in turnaround times of loans,” Phillipou said.

For the customer, it is considered a “humanless, paperless experience, anywhere, any time on any device”.

Digital mortgages are a true 24/7 model, he said, describing turnaround as “almost immediate”.

“It’s based on the provision of access to personal accounts and personal information which can be facilitated electronically via different data aggregation capability,” Phillipou said.

However, digital mortgages appeal to a narrow group of customers, generally “vanilla cases”, that meet certain criteria, he said. That’s because a borrower qualifying for a digital mortgage would generally fit the profile of the lender’s decision-making scorecard.

A typical candidate for a digital mortgage would be a borrower with minimum equity of 20%, who represents very low risk to the lender. 

“As an example, the customer would have a very low loan-to-valuation ratio (well under 80, maybe well under 50% LVR), high serviceability of the loan, hence why the opportunity for a pure digital mortgage is quite low because generally there’s a little more complexity on the applicant’s position,” Phillipou said.

A customer would typically instigate the digital mortgage process themselves. They would have a lender in mind and would have a reasonable expectation that they could meet their criteria.

“Subject to the information (e.g., personal, income), which has been input into the application, the decisioning capability is all part of the digital mortgage solution – it’s automated based on complete information in the system and done in a matter of seconds,” Phillipou said.

While many prospective mortgage borrowers want to speak to someone, Phillipou said there were a group of people who felt they had enough information and wanted a fast decision.  For a customer, the key benefit of a digital mortgage was the “speed to yes”.

“For the consumer, it’s really that speed, that humanless digital experience, and being able to get an answer very quickly on what they want to borrow,” Phillipou said.

For a lender or other financial institution, a key benefit was removal of the customer from the market, therefore helping them build market share.

“It’s a fully automated digital experience allowing the staff to focus on more complex, high-value customers and tasks, creating a lot of operational efficiencies, lowering the cost to serve.”

Currently, digital mortgages cater for limited use cases and customers with a good credit rating, low LVR (high deposit), he said.

“Anything that falls outside the predetermined rules (set by the financial intuition), will drop out of the system, so that makes it more narrow,” Phillipou said.

“The more complex lending scenarios need to be handled differently and are not something that a digital mortgage can cater for, so again that’s a gap.”

For those customers who don’t meet the digital mortgage criteria, Phillipou said there was an opportunity to look at what their experience would be, which would inevitably require more information.

That customer would then fall outside of the digital mortgage parameters and would require relationship management.

“If you’re a provider of both digital solutions and relationship banking, it acts as a lead generator for the channel too … you can then triage [the lead] out to a call centre or a banker, for someone to then talk to that customer and facilitate them to get the solution that they’re seeking,” Phillipou said.

Asked whether digital mortgages posed any form of threat to brokers, Phillipou said for simple lending scenarios, digital mortgages could have the ability to remove potential customers from the broker channel.

“It’s determined by the level of comfort the consumer has with a fully digital solution for the largest and most important purchase they make,” Phillipou said.

As more than 60% of loans were originated by brokers, brokers already played a terrific role in that channel.  Customers who initiate a digital mortgage application and were bumped out of the system had the opportunity to seek advice, providing a lead opportunity for brokers.

“These customers will need to turn to someone for advice and guidance, and that’s where brokers play a terrific part,” Phillipou said.

This supported experience in the US, he said, where digital mortgage operators such as Rocket Mortgages created opportunities for broker or third-party channels where advice was required.

AFG head of sales and distribution Chris Slater (pictured) said digital mortgages allowed brokers to provide more choice,  which was good for competition.

“Brokers do loans all day, every day, for a living and provide the convenience, research and comfort that Australian borrowers seek,” said Slater. “Many of the digital players that started out looking for direct relationships with customers have turned to the broker channel for distribution as that’s where customers are.”

Read more: AFG starts 2022 strong

He said digital mortgage solutions were an option for pay-as-you-go borrowers with sufficient equity, who wanted to deal with a specific lender directly.

“Seeing a broker will always remain the best option for anyone whose circumstances are not ‘cookie cutter’, who is not 100% confident they are getting the best deal or who is not experienced in the borrowing process,” Slater said.

As the development of digital mortgage capability increases, brokers could continue to communicate their service, which included BID, requiring them to put the customer’s best interests ahead of their own.

Brokers could also focus on the advantages of multiple options over mono brand and product digital providers, Slater said.

Brokers also had an opportunity to use digitalisation to enhance their customers’ experience, he said.

“Customer Data Rights [and] open banking presents opportunities to remove many of the pain points seen with income and expense gathering and analysis. However, it will require a change in mindset from the credit community to acknowledge that discretionary expenditure can be adjusted to meet commitments for many people,” Slater said.