Why Open Banking is the key to revitalising the mortgage sector – Nordigen

Why Open Banking is the key to revitalising the mortgage sector – Nordigen

Why Open Banking is the key to revitalising the mortgage sector – Nordigen

The mortgage market in the UK is only just recovering from recent turbulence, which saw interest rates rise rapidly.

Amid economic uncertainty, lenders repriced their offerings, and following the mini Budget over 40 per cent of mortgage products were removed from the market. This was followed by the Bank of England increasing the base rate to three per cent – the eighth rise since December 2021 – in a bid to fight runaway inflation. 

This is already impacting two million homeowners and will continue to prevent future homebuyers from gaining access to the market.  

According to Bloomberg Economics, higher interest rates for lenders will cause the average monthly cost of a two-year fixed-rate mortgage to increase by 70 per cent, from £779 in January of this year to approximately £1,325 by the end of Q1 in 2023. With higher rates, borrowers are faced with fewer options, struggling to apply for financing or left out completely.  

While rising interest rates will affect borrowers tremendously, mortgage brokers and lenders will also be faced with challenges. Although higher interest rates are typically associated with more profit for lenders, the situation could increase the number of mortgage defaults dramatically.  

To help lenders navigate risk during these difficult times, they must turn to modern solutions, such as Open Banking.  


A modern approach to risk assessment  

Traditional credit checks and lending processes are outdated, relying on information from credit bureaus that is not regularly updated. This often results in lenders performing creditworthiness assessments that are inaccurate or lacking crucial information. 

Currently, mortgage applications take four to six weeks on average. During the application process, customers must provide bank statements, proof of income, identity, address and deposit, which must then be thoroughly analysed. The data present in these documents is already stored within users’ bank accounts, which could conveniently be imported into the lender’s system within minutes via Open Banking APIs.  

Open Banking is secure financial data sharing between banks and third parties through APIs with the user’s consent. In the context of mortgages, it enables consumers to share bank account and transaction information directly with lenders to allow them to make more accurate decisions, propose personalised rates and offers based on insights. Lenders can tap into this modern way of assessing creditworthiness to ensure they are risk averse and protected from defaults. 


How Open Banking is revolutionising mortgage lending 

With Open Banking, banks have the possibility to address some of the historical problems that have hampered mortgage lending, such as high costs, manual processes that rely on physical documentation, a lack of plan and rate personalisation, low profitability, slow and delayed processes, and higher risk of fraud.  

Open Banking introduces a level of automation that makes lending more efficient by requiring less physical documentation and manual analysis. By reducing the number of data points that must be manually analysed, Open Banking can minimise administrative costs for each individual loan application and increase approval rates.  

Accessing a variety of financial or alternative data from bank accounts allows lenders to work with thin-file clients, who would otherwise be overlooked. This data can also be used to provide tailored offers to borrowers, based on their financial history.  

Lenders can foresee risks and reduce defaults by evaluating clients’ financial health, assessing their spending and categorising transactions. Furthermore, lenders can increase customer acquisition rates from mortgage data by offering better offers to current homeowners with high interest rates. 

Open Banking is vital for any financial institution operating in the modern world, and the mortgage lending sector could see tremendous benefits from utilising the technology. 


Rolands Mesters, CEO and co-founder of open banking platform Nordigen

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