Mortgage Lending: Where to From Here for Australia's Major Banks

Defining the challenges that lie ahead in mortgage originations, servicing and default management is vital for financial institutions looking to accelerate growth while building trust and loyalty among customers. And while the financial services sector has done much to leverage data for insights about their customers, now is the time to advance their analytic capabilities to the next level.

Stuart Musgrave, Principal Advisor Financial Services, Equifax said: "It's one thing to know about your customers from their interactions with your business. But it’s also of great benefit to understand the interactions these same customers have outside of your business."

"When multiple rich data sources, sophisticated data interpretation and machine learning technology come together, that's when real-time, highly predictive credit decision-making becomes possible."

He says that widening the visibility net is crucial for learning what you don't already know about your customers. With a wave of mortgages delinquencies expected and the ever-present threat of nimble digital challengers, big banks must look at whether they have what they need at their fingertips to make well-informed decisions.

How much do mortgage lenders know about which customers will be unable to meet their loan repayments once government stimulus ceases? APRA data shows that around 80% of borrowers from the 102,000 residential loans left in deferral (as of 31 Dec 2020) haven't made any repayments on their loan. What does this population of borrowers hardest hit by the pandemic look like? What can be revealed about their credit behaviour by digging deeper into their digital interactions?  

Mortgage repayment trends that lenders will want to know about

Equifax repayment history¹ analysis has uncovered several key insights about borrowers in loan deferral.

Here are some of the critical takeaways for mortgage lenders:

• Borrowers with multiple consumer finance accounts – credit cards, personal loans, auto loans – have a higher mortgage deferral rate.
• A borrower with 4+ consumer lending accounts is approx. 92% more likely to defer their mortgage than a borrower with one account.
• There is a lower level of mortgage deferral among borrowers with high credit quality.
• Low credit score borrowers are most likely to remain in deferral as banks wind up their programs.

Equifax comprehensive credit reporting (CCR)² analysis shows that when Australian borrowers are credit stressed, they seek to protect their primary financial relationship:

• Significant levels of arrears and delinquency show up in credit card accounts as far as 12 months in advance of mortgage arrears.
• Arrears rates are 3-4 times higher in cards from a different credit card provider to the mortgage 6-12 months out.

"Borrowers will let credit card payments slip in order to maintain their mortgage repayments, especially when the credit card is held with a different lender," says Musgrave.

He explains that advanced analytics are useful not only for unearthing valuable credit interactions but also to shed light on the implications of shifting consumer behaviours and market dynamics. He gives the example of a recent Equifax analysis that detected a market shift due to APRA's annual growth cap on lending to property investors. The research showed that non-APRA regulated lenders used these restrictions to snap up a disproportionate market share.

"We found a significant proportion of big four bank residential mortgage borrowers had their investment property with a non-APRA regulated lender. There were substantially different arrears rates across both products," said Musgrave.

He adds that the mortgage broker best interest obligations are also sparking some interesting trends in product suitability.

"We expect the arrival of the design and distribution obligations will further exacerbate this situation. There's a lot of seemingly innocuous trends that can have a significant effect on the market."

How mortgage lenders can find pockets of risk and opportunity

Are you keeping pace with these changing dynamics – and your competition – while still serving the needs of your customers? Using smart analytics to optimise origination and improve product suitability will position lenders to enhance the customer experience and reduce the time it takes to make credit decisions.

As a global data, analytics and technology leader and the largest credit information and analysis provider in Australia and New Zealand, Equifax are experts at defining and designing knowledge from data. Globally powered and locally integrated, we drive more powerful and applicable insights across more of the value chain. The rollout of our next-generation credit score is an example of how we help financial institutions reduce risk, fast-track the time to decision and improve the customer experience.

• Equifax One Score

The next generation Equifax credit score – Equifax One Score – employs the latest developments in AI (xAI) and machine learning to achieve considerable improvements in predictive power and coverage. For lenders navigating a changing landscape, this enhanced risk assessment tool makes it easier to identify liabilities and extend credit responsibly by more accurately assessing each customer's risk of default.

With explainability goals built-in at the design stage, Equifax One Score gives lenders and consumers visibility around how decisions are made. In contrast to the usual 'proxy' or average explanations, the reason codes generated by this ground-breaking scoring methodology are personalised to individual consumers.

As part of our ongoing mission to ensure fair outcomes in credit scoring, there has been much work done to ensure the algorithms and processes behind Equifax One Score guard against bias. Rigorous testing has shown that neither age groups nor genders are unfairly represented in this new generation of credit score, giving lenders confidence that Equifax One Score means equal access to credit for all.

• Smart use of CCR data

Equifax is the market leader in consumer credit infomration, holding the most extensive data collection, including CCR data, than any other Australian organisation. These new positive data elements provide increased credit risk signals, further refining the accuracy of the score. In Equifax One Score, the latest comprehensive credit reporting data augments our vast repositories of negative event and enquiry data.

With the emergence of new Buy Now Pay Later players and products over the last few years, increasing signals have built up in our data assets about what this profile looks like and how it relates to credit risk. We are now in a position to be able to leverage all this valuable data into our new generation score. Geodemographic data is also fed into the score, providing the opportunity to form inferences about credit behaviour according to where a consumer lives.

The rollout of open banking brings many new alternative data sets that can add another layer of information to existing credit reporting. Work currently underway with bank transaction data hints at the possibilities that lie ahead for non-traditional data sets to increase financial inclusion. Equifax is currently building a predictive model prototype based on transaction data using advanced analytics and innovative techniques.

⁽¹ Trends start from March 2020 and focus on a Sept 2020 repayment history snapshot from the Big Four banks and their subsidiaries. ² 2019 CCR data analysis)

Learn how data, analytics and technology can put you in a stronger position to outrun your competitors with smart, customer-centric decisions.