As lenders make it easier for people to get mortgage advice online, this trend highlighted in the survey could lead to lower personnel costs among “digital” lenders, who should pass on these savings to consumers in the form of lower interest rates. However, To sway shoppers from traditional lenders, the savings would have to be upwards of 0.20 percentage points, or more than $195 a year per $100,000 of mortgage.
Digital Journal: How is digital transforming mortgage lending?
Rob McLister: In a nutshell, online mortgage origination requires less human resources. The benefits of that are lower compensation costs for lenders, less brick and mortar expense and a faster application, approval and closing process for consumers. Savings from automation and labour are increasingly being passed through to borrowers by way of lower mortgage rates. Lenders relying heavily on traditional (non-digital) origination methods are slowly ceding market share among prime borrowers, a trend that will likely continue throughout this decade.
One interesting side note: Online lending is starting to shift headcount in the industry. Commissioned mortgage specialists are slowing giving way to salaried advisors, for example. If online stock trading is an analogue, the future will have call centre mortgage reps and fewer mortgage bankers and brokers.
DJ: To what extent is this being driven by customer demand?
McLister: Our data shows that only about 1 in 5 borrowers prefer online-only lenders by default. But 2/3rds of mortgage shoppers would consider them if the price were right.
The fact is, mortgage profit margins are so tight that lenders simply can’t afford to pay mortgage advisors big commissions and pay branch overhead costs and still be the lowest rate in the market. The more that customers see great deals online and the more that lenders provide them instant quality advice via the web, the more Canadians will gravitate to cheaper online brokers and lenders.
DJ: What types of savings are possible through digital mortgages?
McLister:Online-only lenders are roughly 10-20 basis points below typical unpublished big 6 Bank rates. Compared to advertised bank rates, however, the gap is much wider. Many borrowers see much lower rates at online providers, with no negotiation required, and figure, “why bother with my bank?”
A 10 bps rate savings equates to about $1,400 of interest savings over five years on a standard $300,000 mortgage.
DJ: How do digital mortgages provider services compare with traditional lenders?
McLister:The differences between the two are slowly fading as big banks roll out more capable online mortgage platforms. Today, however, the main differences relate to the breadth of rate choices and the way that advice is delivered. Digital mortgage lenders offload most of the application and document upload processes to the borrower. That’s one way they keep their rates low. Traditional lenders are more high-touch, typically with commissioned mortgage specialists who walk you through the whole process. For consumers, it’s basically a choice between speed and savings versus hand holding.
DJ: Are there additional security considerations?
McLister:If Equifax can get hacked, anyone can get hacked. But so far, online security concerns haven’t thwarted the growth of online lenders.
DJ: Who are the main players in the digital mortgage space? Is the market competitive?
McLister:HSBC, motusbank and Tangerine are the current front-runners among online mortgage lenders. Among the Big 6 banks, Scotiabank and TD Canada Trust are leading the way, given that their new online channels offer materially lower and more transparent rates than banks have traditionally.
Lenders are being challenged by online brokers who use rate comparison websites to reach mortgage shoppers. Leaders in that space include the likes of intelliMortgage (a Kanetix company), Butler Mortgage, True North Mortgage and Sigma Mortgage.
Before consumers ever contact a lender, data shows they’re increasingly researching rates online. Their first stop online is typically a lender website or a rate comparison site. Traffic to the latter has been growing as consumers look for more objective sources of mortgage information and a wider array of rate choices.