As we wait for November’s Budget announcement, widely expected to include some painful tax rises, it’s perhaps no surprise that four in five (81%) of UK consumers are concerned about their finances, according to the latest EY Future Consumer Index.
The professional services firm’s analysis shows more than half (58%) of consumers are now extremely worried about rising costs and the cost of living, up 5% since last year.
A quarter of consumers across the country are now extremely concerned about their job security, up 11% on last year.
This is a tough outlook for mortgage lenders – when consumer confidence is under pressure, large financial decisions tend to be put off until a more certain future emerges. Interestingly, and may be counterintuitively, there is an opportunity in this however.
Where change seems like too big a commitment for homeowners amid persistently over-target inflation and a rocky employment market in a significant proportion of sectors, the reassurance of sticking with what you know is more attractive.
UK Finance’s forecasts for 2025 anticipated a 30% surge in external remortgaging and a 13% rise in product transfers. The gross value of remortgage over the year is expected to be £76bn, compared with £254bn worth of product transfers.
While the dominance of product transfers over the past five or so years has been driven largely by higher interest rates, we are now in the position where we’ve had five cuts to the Bank of England base rate since August 2024.
For borrowers coming to the end of two-year fixed rates this year and next, monthly payments are likely to come down when switching to a new deal. In the current economic environment, this may work in lender’s favour – particularly where borrowers are inclined to be conservative.
For the tier of lenders that sit under the big six high street lenders, this represents a significant opportunity to boost retentions. The larger building societies make up the majority of this contingent, and often differentiate their offerings based on service and underwriting flexibility. More specialised product offerings are also an attraction for both borrowers and brokers looking to place cases that sit just outside the most standard of applications.
Because of their size and cost of funds, these differentiators are key to writing loans. But due to more specialised underwriting, the cost of onboarding new borrowers is relatively high.
For tier two lenders, retaining borrowers is fundamental to maintaining market share and a robust balance sheet – something that both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) both have front of mind as the economic outlook remains relatively uncertain.
Brand loyalty and good customer service will take you so far – indeed building societies often say that they have a strong base of customers who stick with them for the sake of being able to pick up the phone and speak to a real person. That works for a generation of borrowers – but most typically they fall into the older demographic.
Increasingly, younger borrowers – even those in their 40s – want to interact with service providers of all types online without any human contact. The exception to this is for first-time buyers, who undoubtedly value the advice and reassurance offered by someone to hold their hands.
Where the decision is a straightforward product switch though, especially for homeowners who have been through that process in the past, lenders increasingly need to make the online journey to achieve this as free from barriers as possible.
Smooth digital transactions can be make or break for a rising number of borrowers, who might have considered a product transfer but if it’s easier to interact with another lender, it’s realistic to assume that brand loyalty won’t be a top factor in their decision.
This is particularly important at the moment as lower mortgage rates will make it easier for borrowers coming off two-year products to pass affordability tests with a new lender.
It’s also the case that brokers want simpler systems that save them time, considerable administrative cost and aggravation. Now more than ever, where transaction volumes are critical to business profitability.
The answer to improving customer retention is better technology. And it doesn’t have to cost the earth to implement. There is an endemic view across the mortgage market that switching origination platforms is prohibitively expensive, time-consuming and fraught with risk. With cloud-based plug and play systems, that is just not true any longer.
At Finova, we are working with a number of building societies and other lenders to provide a technology solution that is proven to make a real difference to customer retention performance. In today’s market, the commercial case for considering investing in this sort of solution now outweighs the fear of change among lenders.
Hamza Behzad is business development director at finova
