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Viewing report
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Direct Mortgages Market Assessment 2000
Key Note Publications Ltd, Jan 2000
Introduction
This report focuses on these questions:
Who do direct mortgages benefit most, and why?
How is the growth in direct mortgages influencing the mortgage business and the housing market?
Definition
The old definition of a direct mortgage was a mortgage sold by the provider direct to the customer, without an intermediary. This does not suit the present market, where online brokers sell mortgages from a clutch of suppliers, but direct to customers. Direct selling companies such as Virgin source financial processing and expertise from traditional banks (in this case Royal Bank of Scotland), and banks have portfolios of mortgages sold to different groups of customers in different ways: sometimes through independent financial advisers (IFAs), sometimes through the bank's own staff, and sometimes by telephone or online. NatWest (owned by Royal Bank of Scotland) has such a portfolio. Mortgages have ceased to be rewards for saving up a sizeable home deposit, and are all about marketing.
Strategic Overview
Mortgage loans are a significant element in the UK economy, accounting for two-thirds of gross domestic product (GDP), compared with less than 10% in Italy, Greece and Austria. Mortgages are still national products. Cross-border selling is constrained by national legal, consumer protection and taxation systems, and by the scarcity of international brands in mortgage finance.
Property prices are propelled upwards because of a tightening ratio of dwellings to households. Housing starts are restricted in London and the South due to a shortage of sites with planning permission, and strong opposition from environment and countryside lobbies. Increasing property values - up by around 14% in 1999 for the UK as a whole - give house owners and buyers more equity which they can convert into cash. Flexible mortgages let them do this easily.
Low incomes are a barrier to increasing levels of owner-occupation above 70% or so. The average gross income of mortgage-holding households in 1997/1998 was £547 a week, compared with just £155 a week for local authority and housing association tenants. Most of the growth in the mortgage market is likely to come from new households, from larger loans as prices rise, and from rolling equity release. There will also be a growing need for mortgages on dilapidated properties, particularly in the buy-to-let sector. Around 7.5% of dwellings are dilapidated. Public-private partnerships are needed to ensure that private developers, who build more than 85% of homes, take account of social need. More homes are needed for single people, including the divorced and separated, who accounted for 11% of home moves in 1997. The rise in the divorce rate helps to maintain property values in lower and mid-price ranges, as those involved seek cheaper homes. The increase in cohabitation as opposed to marriage exerts a slight negative influence on mortgage demand, as cohabitees are often more nervous of financial commitments.
Government plans for the housing market include shared equity schemes, online conveyancing, a quality mark for the construction industry, mortgage bonds to increase the flow of low-cost funds, higher take-up of mortgage payment protection insurance, and the new CAT standard for mortgages. The initiatives should improve access to and stability within the property market, especially at the bottom end. Generous Housing Benefit fuels growth in the buy-to-let sector.
In 1999, 1.46 million dwellings were sold in England and Wales, 9% more than in 1998. Gross mortgage lending in the UK was £113.8bn in 1999, nearly 60% more than in 1996. Net lending in 1999 was almost £38bn, 97% more than in 1996. Non-traditional lenders achieved 15% of net lending in 1999, and supplied more than one mortgage in 10, compared with one in 24 in 1992.
Mortgage growth is mainly from existing owner-occupiers who are moving or remortgaging, and reflects the rapid acceptance of flexible mortgages. Interest-only loans account for nearly a quarter of new loans, and repayment mortgages for just under half. In 2000, flexible mortgages are expected to exceed 25% of all new loans.
Market Assessment estimates that direct mortgages accounted for around 6% of the total in 1999, £7.08bn, and it expects direct products to be worth between £15bn and £16bn by the end of 2000.
The Halifax, Abbey National and Cheltenham and Gloucester (Lloyds TSB) are the major mortgage lenders. Market Assessment estimates that direct mortgages are led by Virgin Direct (One account), Bank of Scotland and Direct Line. The top 10 in direct mortgages account for more than 60% of the sector.
Consumer Dynamics
Market Assessment commissioned National Opinion Poll (NOP) Solutions to undertake consumer research on direct mortgages in 2000.
Considerable consumer resistance to impersonal direct sales is apparent from this latest NOP survey. In March 2000, almost nine in 10 (87%) agreed that it is important to speak to somebody face to face when arranging a mortgage. This is a big increase on 1998, when three-quarters of those interviewed (75%) cited face-to-face discussion as important, and is also more than in 1996, when interviewees also ranked discussions highly.
This preference for speaking directly to `real people' is a blow for specialist direct sellers, who must also be concerned by the resistance in other attitudes. There appears to be more ignorance of direct suppliers than in 1998, and similar levels of anxiety about the risks of a direct mortgage. Worries about not qualifying for a direct mortgage are at higher levels than in 1998, and marginally higher than in 1996. The proportion thinking that there is less bother in obtaining a direct mortgage is back to the 1996 level of just over a quarter, after a slight increase in 1998.
The reasons for this apparent block in consumer acceptance may include information overload, and the prevalent `small print' which must, by regulation, form part of every advertisement. The small print is intended to protect the customer, but is also often complex and confusing. The endowment shambles has shaken customers' confidence in insurance companies, and more than four in 10 would consider taking responsibility themselves for raising the capital to repay an interest-only mortgage.
Three in 10 expect to obtain a direct mortgage in the future, the same as in 1996 and fewer than in 1998. The Internet features prominently in their plans: 8% have already used the Internet to look for a mortgage, and almost one in five intends to do so in the future.
However, the `flexible mortgage' concept is more popular, already, than the `direct mortgage' concept. Almost one adult in two would take out a flexible mortgage.
Marketing Developments
IFAs retain a significant role, a point reinforced by the NOP survey, which shows that nearly nine people in 10 want to speak to a real person when arranging a mortgage. Online services are expanding rapidly - for example, John Charcol and Independent Mortgage Brokers.
The biggest mortgage advertisers are Lloyds TSB's Cheltenham and Gloucester, the Halifax, and Virgin Direct for the One Account flexible mortgage. Virgin is the top advertiser of direct mortgages, followed by Money Store and Direct Line.
Response to direct mail for mortgages is very low (less than 2%), yet mail remains an important medium for potential customers who lack Internet access and who do not read the financial pages regularly.
The Internet is revolutionising marketing and is helping customers to take the initiative by selecting suitable products. Direct sellers need a presence on the online money supermarkets which, for many mortgage hunters, are the first port of call. Mobile phone Internet connection will bring financial surfing to ever-increasing numbers of potential customers. Complete online sales are not possible yet, but will be once digital signatures have legal clearance.
In contrast to technology-based marketing, word of mouth is becoming more important. Direct Line calls this the `power of advocacy' and has great respect for it.
Company Developments
Abbey National has faith in its new Internet bank, `cahoot'. Alliance and Leicester is keen to sell mortgages through all available channels. Bank of Scotland is strong in flexible mortgages. Barclays does not see `direct' as separate products, but just as one communication channel. Bradford and Bingley has acquired the leading mortgage broker John Charcol. Bristol and West aims to offer a wide range of mortgages through as many channels as possible. CGU, planning to merge with Norwich Union, sold its existing mortgage book and started an online venture.
Europeloan, a Belgium-based bank, intends to be selling mortgages on the Internet all over Europe by 2001. First Direct has some problems promoting a distinct image now that it has so many competitors. The Halifax has bought Birmingham Midshires and has developed interesting modular `mix and match' mortgages. Legal and General includes flexible mortgages in its range of property products. Lloyds TSB's Cheltenham and Gloucester is trying hard to keep its position in a tough market. Market Harborough Building Society is all geared up for complete mortgage sales over the Internet. National Westminster is benefiting from Royal Bank of Scotland's marketing flair, and has launched a base-rate-linked flexible mortgage. The Nationwide can afford to trim margins because of its mutuality. Northern Rock is planning to sell mortgage-backed bonds, a concept the Government is very keen on.
Paragon and Promise offer streamlined online services for those with substantial equity. Prudential's Egg is one of the direct mortgage top 10. Royal Bank of Scotland's Direct Line has a big programme to improve cross-selling opportunities. Standard Life is gaining a reputation for generous loans in relation to borrowers' incomes. The Woolwich is active in mobile Internet developments. Virgin takes the promotion prize for direct and flexible mortgages, and has helped to change perceptions of a mortgage from a long-term debt to a major source of cash.
The Future
The British obsession with property can only increase now that a mortgage can so easily be a source of cash. For those who own their own dwellings outright, equity-release products have very good prospects.
Home workers are increasing in number, but rarely find the facilities they need in new homes, so the construction industry is missing an opportunity. Home working is particularly significant in remote rural areas, where it helps to underpin property prices and mortgage sales.
The information revolution has given power to consumers, who are now much more likely to search for products and companies which suit them. They will seek to deal with companies which they trust. Transparency is a prerequisite for long-term trust, and thus for effective marketing.
Insurance companies' images have been tarnished by consumer anger over underperforming endowment policies, and put them on the back foot in the highly competitive mortgage market.
Women stand to lose out from marketing developments based on technology. They use the Internet much less often than men, and often prefer to obtain a mortgage from a traditional bank or building society branch.
By 2004, no more than a third of customers are likely to obtain a completely direct mortgage, which by then will mean a mortgage obtained without a face-to-face meeting at any stage. In Market Assessment's pessimistic scenario, gross mortgage lending in 2004 will be 5% higher than in 2000 in real terms, and within the total, direct mortgages will have grown by 126% to a 25% share. In its more optimistic scenario, real growth for all mortgages will be 42%, and direct mortgages will expand by nearly 270% to attain a 30% share.
Market Assessment expects Virgin and the Scottish banks, notably Royal Bank of Scotland with its interests including Direct Line and its co-operation with Virgin, to continue to shine as direct sellers. Money Store and Kensington are among those with the potential to succeed at the riskier end of the lending spectrum. Barclays is effectively extending its still powerful brand.
Margins will narrow as older, more profitable mortgages come to an end. This will intensify competition and cause fringe lenders to withdraw from the market.
Direct mortgages benefit confident, pro-active borrowers. They are not the most significant development of the moment that accolade goes to the flexible mortgage. The great majority of customers will still want to discuss their application with an expert face to face, but companies forced to cut costs will have to axe staff, so there will be fewer advisers for customer to meet. The new CAT standard should give mortgage hunters - especially first-time buyers - greater confidence when making their selection.
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