Dated tech stacks and an over-reliance on manual processes prevent banks and traditional mortgage brokers from innovating.
When it comes to mortgage innovation, banks lack product variety and processing efficiency. Banks are stuck in a paradox where they try to offer clients the best mortgage solution, but only if it fits within their limited product suite. This leads to banks rejecting clients that could actually qualify today with another lender or qualify for a higher amount. Oftentimes, the client is recommended a suboptimal solution, compared to what they could get elsewhere.
Banks also suffer from dated technology systems that are not easily replaced. Combined with overly bureaucratic layers of decision-making, this translates into longer lead times for consumers and more restrictive qualifying criteria that many Canadians have a hard time meeting (e.g. self-employed).
For traditional mortgage brokers, their existing processes limit their scalability. Many high volume mortgage brokers take a manual approach, which tends to be highly personalized, but low tech. Many of them ultimately try to hire assistants in order to scale further, but find that the conversion suffers as a result if they’re not directly involved in each deal. Convincing traditional brokers to adopt tech-forward solutions is a difficult task that few companies are able to successfully implement.
As a result, tech companies try to integrate all existing systems that mortgage brokers rely on to minimize friction. While this can help, it comes at the expense of functionality and adoption as the platform is anchored to the integration partner. Maintaining those integrations in the tech stack can be both time-consuming and expensive since any of them can change at any time.
This lack of mortgage innovation makes it more difficult for Canadians to enter the housing market
The result of these limitations are significant. The products which lenders offer don’t keep up with the changing needs of the economic realities that many Canadians face today. The right solution for Canadians is almost completely reliant on the broker having the knowledge to pick the right solution from over thousands of available combinations of mortgage options they have at their disposal.
Down payment and income are two critical factors that impact how consumers qualify for a mortgage in Canada. Based on recent data from one of Perch’s most popular tools, only 51% of buyers are qualifying for the purchase price they want. Of those who did not qualify at their desired purchase price, 85% of buyers had a sufficient down payment, but were held back by their lack of qualifying income. On average, the non-qualifying income buyers only had 70% of the required income needed to qualify, and often had less than 20% down payment.
Most people focus on being able to get pre-approved or not, but the reality is that pre-approvals can vary dramatically by lender. In one of our most extreme examples, one of our clients was pre-approved for a $121,000 purchase price with their bank (which was nowhere near their budget). We were able to get her pre-approved for $490,000 with a prime lender at a lower rate in less than 2 weeks.
We see these kinds of situations all the time at Perch. We work with buyers to help identify alternate solutions that can help them overcome most hurdles. This includes ways to increase their down payment amount, suggesting lenders with credit parameters that better fit their situation and much more. We do this by combining auto-adjudication and optimization algorithms to assess thousands of options and determine the best fit for that user’s situation in under 30 seconds.
New fintechs focus on improving the client experience, offering more mortgage options and streamlining the application process
Up until now, innovation in the mortgage space has focused on adding efficiency to a mortgage broker’s existing process, such as automated document collection and down payment validation or e-signatures, through services like DocuSign.
However, newer fintechs have found ways to innovate further. Perch is investing in areas of mortgage auto-adjudication and optimization that enhance our mortgage team’s ability to recommend solutions. In addition, Perch intends to leverage machine learning models that can predict what transactions a user will take and the expected value of that transaction to help their mortgage advisors and referral partners better focus their efforts on their leads.
Perhaps the biggest benefit to Canadians is Perch’s vision for streamlining previously disconnected parties, through interconnected portals that allow clients, realtors, wealth advisors and mortgage brokers to collectively help their clients by having insight into when someone needs their services and keeping customers engaged over their lifetime as their needs evolve. We’re building a system that enables us and our partners to not only anticipate their changing needs, but to make suggestions they may not even have thought about to improve their financial position and build wealth.
Other notable companies like Savvyy are helping banks become more digital and efficient in the lender space with their enterprise systems. Savvyy helps lenders underwrite and service loans efficiently by using data and design to reduce the costs associated with loan processing. Mortgage Automator is another company that helps private mortgage lenders streamline their operations, allowing them to focus on growth. What began as a simple document-generating tool for a single private lending company, has since evolved to become a comprehensive end-to-end loan origination and servicing software.
The bottom line: A modern mortgage industry is coming and fintechs are leading the way
Despite the slow-moving nature of a highly regulated financial services sector in Canada, widespread change is coming. Open Banking regulation will encourage more competition in the lending space, tech solutions will add operational efficiency and reduce turnaround times for clients. The Canadian consumer should ultimately be the largest beneficiary resulting in better service, more options and lower prices.