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Loan Introducer The latest from the second-charge market
How open banking can help with the cost-of-living crisis
Matt Meecham
chief digital officer, Evolution Money
As the UK braces itself for what will be a record winter for energy bills, it is vital we use every tool at our disposal – including open banking – to help the most financially vulnerable.
Central heating thermostats have been firmly switched off throughout the summer, but once the colder weather approaches, the true cost of the everrising energy price cap will be felt.
The latest forecast from utilities consultancy BFY makes for sobering reading. It predicts the average household could face an energy bill of £500 in January alone. It also predicts that a drop in supply from Russia to Europe will contribute to the average annual household energy bill reaching £3,420 in October, before rising again to an eye-watering £3,850 in January. This is compared to the current Ofgem price cap of £1,971 a year – which had already increased in April from £1,277. In any given year, such an increase would have a substantial impact – but with many businesses and individuals still counting the cost of COVID, the hike for some could be financially devastating.
That is even before the increase in fuel and everyday items has been factored in. With inflation at a 40year high and the average cost of a full tank of petrol exceeding £100, the surge in costs is likely to have huge implications not just for individuals but for the whole country. We must look to ease this.
A lot of the focus so far has been on energy efficiency measures households can take to try to reduce their energy bills, such as insulating their homes. While these are helpful, we also need to look at the bigger picture – and the financial services industry has a part to play in this.
Open banking paves the way for more informed and knowledgeable lending decisions, and could open up a host of products that have the potential to improve a borrowers’ financial situation – something that is urgently needed.
Open banking allows us to track a borrower’s bills and outgoings in real time. We can analyse how they are managing payments, and even predict the likelihood of them meeting their second-charge mortgage payments. It won’t be long before the days of borrowers manually estimating their own monthly expenditure are gone.
Open banking will give advisers, lenders, and borrowers real-time insight into their financial makeup,
which will help ensure borrowers are on the most competitive product.
How many lenders will operate on a worstcase scenario basis this winter when it comes to assessing a borrowers’ affordability in light of rising fuel costs? Or still base their lending decisionmaking on a borrower’s credit score and historic financial information?
As lending risks increase, we are likely to see more borrowers fall outside of high-street lenders’ criteria – even when, in practice, the product they are applying for could be affordable.
Even a small step such as having real-time access to all of a borrower’s outgoings in one place could not only lead to more informed lending decisions from providers but also help borrowers budget and make wiser decisions about their own financial situations.
For instance, in the mortgage market, where advice plays a pivotal role, there are around 370,000 borrowers who could save money by switching from their lender’s Standard Variable Rate (SVR), according to the Financial Conduct Authority’s (FCA) latest findings. Yet, because of either timing or a lack of knowledge, they are not switching.
How many borrowers regularly check comparison tools to switch to the best savings or credit card providers? Imagine a scenario in which borrowers were automatically transferred to the cheapest loan rate based on their financial profile. We are not far off from that.
Technology can help put borrowers in the best financial position possible – not only helping them manage their debt and unsecured credit but also improving their financial standing when applying for a mortgage.
As borrowers’ bank balances are increasingly tightly squeezed, it’s more important than ever to help those who may be financially vulnerable. According to StepChange Debt Charity, in June, the rising cost of living was cited as the most common reason for debt among its clients, with nearly one in five (18 per cent) alluding to it as an underlying cause of their financial problems. How many of these borrowers’ financial positions could improve if providers offered a more tailored approach to their finances? While open banking may be gaining ground, we need to do more. Now is the time for us as an industry to move away from outdated systems and use the power of open banking – and encourage borrowers to do so also. M I
Brace for growth of consolidation enquiries
Tony Marshall
CEO, Equifinance
As storm clouds begin to gather around the economy, and before we look at strategies to help our clients weather the turbulent conditions, we should look back with some gratitude that the conditions for borrowing of every kind have, up to now, been so stable for so long.
But increasing interest rates, the go-to lever for central banks when inflation starts to gather speed, have dispelled any thoughts that ultra-low rates in the mortgage market might continue. Fortunately, the majority of current borrowers (c. 80 per cent) are on fixed rates, so they are in no immediate danger. However, those who have been on variable or tracker rates are already seeing the difference, and the rush to fix their rates is accelerating as those rates are withdrawn in favour of higher ones.
With the summer holidays upon us (including those of MPs whose parliamentary recess only ends at the beginning of September), as well as the Tory leadership contest in progress, there may be less focus on the effects of interest rate rises. However, apart from trying to get away to forget temporarily about the economic bad news, cost-of-living rises are more difficult to ignore when your cash no longer goes as far as it did, even on holiday.
The increasing cost of fuel, since the Ukraine/Russia conflict started, also feeds into cost-of-living rises, which in turn will have an even more negative effect on consumers’ ability to cope. With predictions of a rise of more than £1,200 a year in October from energy consultancy Cornwall Insight, the typical domestic customer is likely to pay £3,244 a year from October, then £3,363 a year from January. The typical bill at present is about £2,000 a year, having already followed a £700a-year rise in April. Rising interest rates and inflationary pressures, plus the rising cost of living, mixed with incomes remaining generally and stubbornly flat, are not a favourable recipe for the majority of consumers – especially those on variable and tracker rates or whose fixed rates are coming to an end this year.
Spare a thought for those borrowing on credit cards. In May, the Bank of England announced that credit card borrowing was rising at its fastest annual rate in 17 years, with many analysts suggesting that a recession looked increasingly likely as growing numbers of households go into debt to make ends meet. The annual growth rate for credit card borrowing hit 11.6 per cent in April – the highest figure since November 2005. Evidence suggests that one of the reasons for this is that more people are using cards to shore up their finances.
How to deal with credit and store card debt is definitely going to be the overriding question heard by brokers over the last part of this year. Those fortunate enough to be homeowners, but who have used short-term credit to tide them over and then have watched those balances creeping up while the cost-of-living crisis gets worse, will be waking up to the danger of letting matters get out of hand.
So, debt consolidation will soon likely dominate conversations between advisers and their clients. With house prices still at their most buoyant, the time to make the most of the uplift in property value to relieve cashflow and pay down expensive credit and store card debt is definitely now. Lending figures for second-charge lending continue to grow. It is claimed that new business volumes are now surpassing the previous high set in 2007. I can only see volumes increasing as more homeowners aim to reduce outgoings and hunker down for the conceivable future. M I
