Making mortgage interest in the common interest

Could open banking make mortgages manageable? Monzo is taking the lead on lenders.

Taking out a mortgage is one of the biggest financial decisions we’ll ever make. It not only determines where we call home and build our lives, but it’s an eye-watering debt and long-term investment. The word literally means 'dead pledge’ because the debt ‘dies’ when it’s paid off, or the property is ‘dead’ to the owner if it’s not paid off.

It may come to have a new meaning because mortgages ending in death are becoming a reality. We’re taking them out later - age 36 on average - and we’re taking longer to pay them off due to higher interest rates. The average deal now lasts around 40 years[1], and in the past three years, over1M mortgages that stretch beyond the current state pension age (66) have been taken out[2].

Banks make more money when we take longer to pay off mortgages and pay more in interest over the term (that is, unless our mortgage is interest-free). Lenders have little incentive to communicate with customers besides a yearly statement because the initial fixed terms are usually only two to five years. Due to legacy systems, we could be with the same bank for everyday banking and our mortgage, but they don’t join the dots, let alone reward us for loyalty. All of this makes our biggest financial commitment completely opaque. There’s little to no transparency, tools or communication. In an era of open banking and personalised customer experiences, why hasn’t this changed?

Enter Monzo. The bank known for its simple customer experience, spending insights, and coral cards, is moving into our bigger financial decisions. In April 2023, it launched its Mortgage Tracking feature which now has 200,000 users. It’s not surprising to see why.

In the Monzo app, customers can connect their mortgage and see it in a dedicated area below their everyday spending. It shows them how much they’ve paid toward their mortgage, how much equity they’ve built up, and how long they have left on their current deal. The initial shock of seeing the large debt in black and white is eased by built-in tools. The Early Repayment Calculator lets customers see the impact of increasing their monthly repayments, even by a small amount, and the Changing Interest Rates feature shows how a rise in interest rate would increase monthly repayments.

It’s intuitive, helpful and enables people to save money. You might go as far to say mortgages never felt like Monzo. The only thing Monzo doesn’t do yet is let customers take actions like set up an overpayment or find a new deal.

That’s where talking to lenders, comparison sites, brokers, or overpayment apps like Sprive come in. Monzo is planning to launch a mortgage product so it could soon help people apply for mortgages within the app, via partners. Imagine if it could nudge you towards the best deal when it knows you’re coming up for remortgage? Particularly at a time when many borrowers will see their monthly repayments rise, with recent figures suggesting 700k fixed-rate mortgages have already expired this year, with another 1.4m expiring by the end of 2024[3].

At a time when affordability is on everyone’s minds, it’s an example of how banks should behave as open banking becomes mainstream. Bringing people’s money together in one place (à la Moneyhub) offers clarity and control, but providers who can use the data to build simple tools that help us take positive actions will win out. Breaking down scary and opaque financial commitments into small prompts, insights and tools helps us feel more in control and improves our lives in the long run. It also builds trust in the financial brands who help us with, rather than merely make money out of, our bigger life moments.

It’s time for less death by mortgages, and more help like Monzo.

Sources:

1. Moneyfactscompare.co.uk
2. Bank of England, Financial Policy Summary, 27th March 2024
3. UK Finance