Mortgages – Yes Someone Actually Wrote A Blog About Them
Like most people who have purchased a home in their life, that was probably the one and only time they thought about a mortgage. If you’re also like most people, the process of getting a mortgage was time consuming, frustrating and overwhelming – not exactly something you want to go through again.
While looking for a mortgage isn’t an everyday activity, it’s still an integral part of society as we know it today and there are many companies looking to improve the process of getting a mortgage. Let’s take a dive into why that is, and talk about the startups disrupting the Canadian mortgage industry.
Why are they important?
To understand why the industry needs to be disrupted, we are going to take a look at the importance of mortgages, how they’ve evolved over time, and what some of the world’s leading Startups are doing to ease the process of getting a mortgage.
Initially, banks were the go-to option for anyone looking to purchase a mortgage so they could purchase their home. As a result, mortgages have been baked into the existing business model of the financial sector. The industry has made progress in many ways and has expanded to include other options when looking for a mortgage – such as using a mortgage broker instead of going directly to your bank.
Understanding the history behind the mortgage industry paints a vivid picture of where the industry needs improvement and how it’s primed for disruption.
Where did they come from and why do they exist?
A Little History Lesson on Mortgages
The Old-Old Times
Although there is some disagreement on when the first mortgages were officially created, the modern mortgages that we know today date back to England in the 14th century. During the middle ages, mortgages were actually deeds that transferred the land title to the “mortgagee”.
“Moreover, the mortgage set a specific date (the “law day”) on which the debt was to be repaid. If the mortgagor did so, the mortgage became void and the mortgagor was entitled to recover the property. If the mortgagor fails to pay the debt, the property automatically vested in the mortgagee. No further proceedings were necessary.” – Advanced Business Law & legal Environment.
We Canadians can thank the UK for something other than our political system – mortgages!
The Kind of Old Times
More recently in England (and in Canada), if you wanted to purchase a land or a home, you would often get your loan directly from the seller, rather than a bank or other third party lender. This would be as if I was selling you a house and I was the one giving you the loan. During this Back then, you wouldn’t actually be able to live on the land until you had paid me back for the entire loan – otherwise, I get to keep the land and all the payments you made to me!
Thankfully, we have progressed as a society and there are a wide variety of mortgage options available to the modern buyer.
The Present
“By the 1900s most mortgages involved long-term loans where only monthly interest was paid while the borrower saved towards repayment of the original sum. Major world events, like the Great Depression of the 1920s and the two World Wars however, led to many borrowers being unable to repay even the interest on a property that was often now worth less than their original loan, and many lenders carrying a loan that was not secured by the value of the property.” – Financial Services Ontario
This forced the industry to react with different options meant to protect both the lender and the buyer. The result? Long term fully amortized mortgages, similar to what we see today. These mortgages featured fixed payments for up to 25 years, which each monthly payment repaying some of the principal as well as some of the interest in equal monthly installments.
However, as inflation started to rise during the 1970s, lenders and borrowers were left in lose-lose situation with the 25 year fixed payment mortgages. The market was constantly changing, but the loans weren’t able to move in tandem – locking the lender and borrower into a less than ideal situation. At this point in time, we see the next major iteration in the mortgage industry – the creation of the partially amortized mortgage. This option better protects both lenders and borrowers from fluctuations in the market and provides more flexible terms over the course of 20 to 30 years. Partially amortized mortgages are now one of the most common mortgage types in Canada.
Main Takeaways
- Origins of mortgages begin in England hundreds of years ago
- The Great Depression and both world wars made it impossible for a large number of people to pay off their mortgages, with the property often being worth less than the loan.
- Rise of inflation in the 70’s changed mortgages into what we know today because people we’re locked into fixed terms that didn’t change rates. This lead to the intro of the partially amortized mortgage, which protects both parties from fluctuations in the market.
Mortgages in 2019 & Beyond
While there has been a lot of progress in the mortgage industry, the process for most Canadians is still completed through their bank or a mortgage broker and is a source of worry and frustration.
FinTech has provided a kick-start for many mortgage-focused startups to disrupt the space by improving the experience for the borrower and lender. There are three main challenges faced by the mortgage industry that are being tackled by up and coming startups:
1 – Speeding up the mortgage process while improving the customer experience
2 – Fully digitizing the process
3 – Meeting regulatory requirements
Startups are approaching these challenges differently based on their end goal. If they are aiming to solve problems faced by large financial institutions, they are tailoring the underlying software and benefits to the existing systems and processes of banks. However, companies like Borrowell are taking the banking away from the banks – meaning, they need to ensure they are meeting all regulatory requirements while building out the products and services they need to improve the customer experience.
The following Canadian Startups are changing the mortgage industry and are all impacting the customer experience, digitization and regulatory bandwidth issues currently being faced in the market.
Startups Disrupting The Canadian Mortgage Industry
An online rate comparison site for insurance, mortgages, loans and credit cards in Canada, received the Startup Canada High-Growth Entrepreneurship Award in Toronto, presented by MasterCard. As a proud winner of the sixth annual Startup Canada Awards, LowestRates.ca is thrilled to recognize and celebrate outstanding achievement in Canada’s entrepreneurship and innovation community across Canada.
Borrowell provides free credit score monitoring, AI-powered credit coaching tools, and personalized financial product recommendations. They has over 50 financial products and services available on its platform, including personal loans, mortgages, and credit cards.
Easyfinancial is the non-prime consumer lending division of goeasy Ltd. offering lending products through an omnichannel model that leverages digital technology to help customers.
Lendesk is a B2B mortgage technology company that helps mortgage originators gather information from borrowers, find an appropriate lender, and manage application submissions and follow-up communication with selected mortgage lenders.
Lending Loop is a peer-to-peer lending platform that provides users with access to capital and allows them to invest in small businesses.
Ratehub.ca provides comparisons between mortgage rates, credit cards, deposit rates and insurance offered by financial institutions to give Canadians personalized financial recommendations.
The one trend that seems to be a part of every startup’s strategy is education. Mortgages aren’t an easily understood topic, which adds to the confusion and frustration of the existing process.
The Future of Mortgages
Whether you’re a young individual or a family looking to purchase their second home, it’s likely that your mortgage buying process is going to include one or more of the above-listed companies. No matter the industry, tech startup trends are all pointing the same way – short-form educational content and customer-centric experiences that focus on reducing the time to complete a process while staying within regulations. Mortgages are no different and the industry is primed for disruption as younger generations are looking for more effective, faster and modern ways of buying their first homes.
Stay tuned for the next blog that will talk about how Canadian banks are managing mortgage risks!
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