Buying a home
Buying and renting a home in the UK are highly stressful activities – a Moneybox survey revealed that 4 in 10 successful home-buyers described buying a home as more fraught than finding a job, planning a wedding or having a child.
A perfect storm of factors, including a shortage of housing stock and increases in interest rates and rental deposits, combined with paperwork-heavy processes to verify income and complete a transaction, make securing a place to live a serious challenge. There’s a high failure rate too, with around 30% of house sales falling through each year.
The risk of fraud is also a concern for all parties, particularly as deposits for both rentals and purchases involve the exchange of significant sums of money.
However, open banking technology – where individuals consent to share their bank account data with trusted third parties – is already helping to tackle some of those challenges faced by sellers, buyers, landlords, tenants, lenders, and estate agents.
In turn, this can support wider economic benefits, with one recent survey suggesting that the first-time buyer economy will be worth up to £74bn by 2025, £3bn of which will be spent on additional home-buying related costs.
Our guide explains how open banking can help speed up some of the integral property buying and rental processes and make home-buying and renting in the UK a seamless experience for all the parties involved.
Buying a home
The same Moneybox survey revealed that it took an average of 5.2 months to complete a purchase from putting an offer in to collecting the keys, and that 28% of respondents highlighted the sheer volume of administration involved in the process as one of the top causes of stress.
We look at some of the ways in which open banking can help with the home-buying process.
Saving for a deposit
One of the key aims of open banking is to build financial resilience, and in the six years since its inception, we know that money management apps have helped people to understand their finances better, offering a clear view of incoming and outgoing finances, enabling them to budget better.
Similarly, open banking savings apps have helped many people build a regular savings habit, often for the first-time in their adult lives, enabling them to quickly and easily move money from their current account to higher interest-bearing accounts.
There is also an open banking-based savings app designed for first-time buyers, which lets buyers open a Lifetime ISA, build their deposit with government incentives, benefit from tax allowances, and allow family and friends to contribute to the fund for their first home. The app also offers savings tips.
Applying for a mortgage
For most buyers, the long paper trail starts with securing a mortgage, and verifying their ability to repay it. This can involve collating several months’ worth of pay slips, bank statements, bills as well as proof of identity and address. The application process alone takes an average of four to six weeks.
However, an increasing number of banks, building societies, and mortgage brokers now use open banking connections to validate a borrower’s income, eliminating the need to provide all this paperwork.
For first-time buyers, linking their current account payments to their credit score, and providing additional evidence of a good financial track record — such as regular council tax payments — can be factored into mortgage approvals.
Open banking data can also go back further than some traditional credit profiles, providing for example, up to two years’ worth of financial information to demonstrate how affordability has evolved over time. They can also aggregate information from other accounts, boosting affordability scores, and take account of large one-off transactions, which can skew results. This makes the process more inclusive than traditional credit scoring systems, and in some cases can mean lenders and mortgage brokers are able to make more personalised mortgage offers.
Importantly, the checking process can now take a matter of minutes instead of days or weeks, saving valuable time for buyers, vendors, and lenders.
In turn, this can significantly reduce the time and admin effort for lenders to make a mortgage offer, saving them time, money, and staff overheads.
It can also help reduce the risk of fraud.
Help mitigate errors and fraud
As well as necessitating the sharing of a great deal of information, buying a property involves the exchange of large sums of money, including deposits, estate agents’ fees and legal fees.
In fact, a deposit for a house is probably the largest purchase that most people will make. Before the advent of online banking, this would have involved a banker’s draft, or making a physical visit to their solicitor’s office with a large cheque and waiting a few days for the funds to clear.
The transparent and secure nature of open banking data connections can also help estate agents and banks to meet their Anti Money Laundering (AML) obligations when verifying the source of clients’ funds, which has historically been a challenge for the house-buying industry.
It can also help to tackle ‘Friday afternoon or conveyancing fraud’. This particular fraud is specific to property exchanges because of the large sums of money which change hands, and it occurs when hackers access either the solicitor’s or home-buyers email account to intercept emails relating to the exchange of contracts and change account details to divert the transfer of funds to their account.
Because a large number of exchanges take place on a Friday afternoon, the fraud is often not detected until Monday morning when it can be too late to act.
Preventing risk of default
Because open banking apps and connections provide greater visibility of an individual’s finances and an up-to-date history of a borrower’s financial health, it can flag up potential repayment issues. This is invaluable for borrowers and lenders alike – lenders can anticipate future risks, and discuss ways to manage them before a borrower falls into arrears, as well as offer assistance to prevent potential defaults.
