Online Mortgage Approvals: Will They Help Millennials?
Over the last decade, the process of receiving small loans evolved from in-person to completely computerized systems. However, the same could not be said for mortgage applications, as the larger of the credit lines have used the same ancient process for many years. The recent trend of large Canadian banks beginning to introduce services that focused on taking the traditional mortgage online. In mid-2019, banks like TD and RBC showcased appealing innovations like determining if an applicant qualifies for a mortgage in less than 60 seconds. This article examines how this technology can disrupt the Canadian real estate market, mainly if it tackles the issue of lack of homeownership amongst millennials.
How it Works
When an applicant becomes interested in purchasing a home, a few clicks through a bank’s website will lead them to an option to determine eligibility for a mortgage in 60 seconds or less. Considering the example with TD: the customer would have to submit a copy of their paystub (or anything that proves an income being regularly deposited into an account), credit report, plus other banking information and personal identification. Then, an algorithm, similar to the ones used for applications for smaller credit amounts such as credit cards, analyzes the information provided. Depending on the amount and the extent of the information that TD already has on the applicant, for example, if the person maintains an active investment account with the bank, has good standing loans and holds various investments there, the algorithm will also use that data in its calculations. Combining all of this information, the system works to determine whether or not the applicant qualifies for a mortgage with TD in under the advertised time of 1 minute or less. Most other institutions follow an almost identical process for their respective services.
It is important to distinguish the term that is used to define the service from what the service actually is. In the case of the pre-approval for mortgages, there are still many complications that force potential customers to submit physical documents, discuss options with agents on the phone, and sign off on things in person. In other words, it is still far away from being a fully automated online application and approval service that it is perceived to be. The ultra-fast process that is advertised is often thought of being the start to finish of obtaining a mortgage, while it is just the decision that could be achieved within the minute. If the decision is affirmative, then the process begins. The Big 5 are not the first institutions to introduce this technology, several smaller banks and credit unions have centered their business model around providing online mortgages were the pioneers of this technology. Start-ups such as LoanSnap employ a very similar process to lower the standard average time of obtaining a mortgage down from 45 days to 7.
Canadian banks have the same goal in mind. More so, their goal is to lure more millennials into their institutions to apply for mortgages and keep their business there. According to a CSBS poll about millennial banking habits, Millennials are most likely to use online (92 percent of respondents) and mobile channels (79 percent of respondents) and are the most likely to use those channels for banking than older generations. It is beneficial for banks to bet on this trend and to introduce services to suit that need. However, unfortunately, it does not change the fact that…
Millennials Won’t Own More
Not yet at least, and this may be the start of a wave of good news for millennials looking to own. However, the underlying issue of most people in this generation being unlikely to own a home in the future is due to the large and constantly growing differential between incomes and home prices. At its core, the problem is about affordability, and while it will be enticing for the generation to apply for mortgages online it will not do much for them in increasing their likelihood of making ownership accessible. In the Canadian real estate sphere, regulation has become much more strict when a lot of mortgage-related policies were introduced a decade ago in the summer of 2009, which was instrumental in avoiding a larger fallout of the American economic collapse on domestic real estate, and more recently with stricter rules regarding “stress tests” in January of 2018. However, these regulations are partly the main cause of the younger generation not having enough to afford houses. While this tech seems flashy and attractive to the average millennial, before the real estate environment improves in favor of them, the service will not translate into more (if any) profits for banks
The consumers, along with the financial institutions need to focus on creating a lending environment that would mean more access to homes for millennials — whether it be done through policy lobbying or electing a government that puts these issues at the top of their agenda. Until lending practices and the overall market environment continues at the current pace of increasing the differential of income and prices, this technology may become entirely obsolete.
The Service is Unproven, the Tech is too Young
Another significant issue that may not signal towards an increase in millennial ownership is that the tech may be too young to have large influences at this stage. As analyzed previously, the tech certainly helps in speeding up the process of obtaining a mortgage for a new home, yet it does not eliminate the sending of, signing of physical documents, and the in-person aspect. Knowing the millennial generation, one would realize that it values things to be innovative in its entirety (if not in entirety, then most of the process to be automated). Most of the time, if the technology is unproved or does not disrupt a larger process in general, then the addition of it creates more complications and difficulties than solutions. A recent Jefferies retail banking survey found that physical banking locations are still viewed as important and a large factor in choosing new banks for millennials. When adding in the consideration of millennials valuing simplicity and efficiency, one could make the argument that this pre-approval mortgage technology may have the same negative impact in the short-run. Again, today it is perceived to be able to give a consumer a mortgage with a big new beautiful home in 60 seconds, the reality is that this technology goes nowhere as far as that.
It is also too early in development to get the actual mortgages out to the customers than perceived. If companies like LoanSnap claim that current averages are around 45 days from start to close of the whole process, and banks such as RBC advertise that they can hold an interest rate for a customer for 120, it goes to show that there is still a lot of progress to be made. Thus, it may be more probable that those very same millennials who prefer everything to be done quickly and online would rather opt for a more familiar option. Seeing their parents going to a financial advisor at their nearest branch when they were children may give them more comfort concerning their finances, so perhaps they will stick with the traditional process until the technology is developed to a point where it truly makes the process fast and painless for the consumer.
Not All is Bad
Of course, there are many benefits to this technology and the service — there are many benefits that are not related to personal finance or mortgages, and are also felt immediately. According to better.com, an American online mortgage service, there have been large increases in the number of borrowers amongst diverse category groups like African Americans and Hispanics. The company claims that its online process is instrumental in eliminating gender, racial, and other types of bias throughout the process of the application. Despite the Fair Housing Act in the United States (which abolishes the requirement of things like ethnicity and gender being listed on a mortgage application), an in-person process may cause unjust biases on the part of mortgage providers as physical interaction still exists. The fully-online process helps in eliminating that, and it is proved by the company’s results in huge increases in the numbers of their borrowers coming from minority groups. This new service is the starting point in eliminating such a bias and will be able to tackle similar issues in Canada as it develops further and takes more and more of the process online.
Conclusion
This is a step in the right direction. Due to the widespread implementation of this new technology, it will create more demand for more of the process to move online. As that continues to happen, unnecessary biases get eliminated as well as the consumer receives the full benefit of homeownership combined with internet banking. Sadly, it will likely have little impact on the larger issue: millennials being squeezed out of the real estate market. A better real estate environment needs to exist for that situation to improve, and unfortunately, this service only innovates a small part of an old process while contributing to the core inefficiencies of the problem.
Resources
https://www.csbs.org/gallup-poll-millennials-and-their-banking-habits
http://www.homebuyinginstitute.com/online-lenders-10.php
https://www.mortgageloan.com/what-you-need-to-know-about-online-mortgages
https://www.td.com/ca/en/personal-banking/products/mortgages/first-time-home-buyer/pre-approval/
https://www.rbcroyalbank.com/mortgages/getting-preapproved.html
