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Navigating Through Uncertainty - The Future of Mortgages in Europe

The European mortgage market has entered a period of unprecedented change, with fluctuations in interest rates creating a landscape of uncertainty for both lenders and borrowers.
Natalia Slota
February 12, 2024

As we explore the market challenges, it's crucial to understand the forces at play and how they're shaping mortgage lending across the continent. In this blog post, we’ll present the market analysis and derive actionable tips on how lenders can successfully navigate these challenges.

The year 2023 marked a unique chapter, with global mortgage volumes hitting a 30-year low. Notably, within the European Union, Q2 of 2023 witnessed mortgage volumes that go back to 2015 levels. Average interest rates in the EU have quadrupled since their historic low in 2021, now resembling pre-2008 financial crisis levels as a response to inflationary pressures. Although data indicates a decrease in house prices across the EU, the pattern remains diverse among countries, making generalizations challenging.

The rise in interest rates has directly impacted the drop in mortgage volumes. The increase in rates has evidently made borrowing less affordable for consumers. As an example, in Germany, Europe's largest mortgage market, debt to income requirements for borrowers have risen significantly, from 22% to 35%.

Simply put, the average German household will need to spend EUR 1150 more in 2023 to repay their mortgage loan instalments compared to 2019. This boils down to a 10% increase in the average household income.

2024: An uncertain market

It remains challenging to predict how rates will evolve in 2024. Certainly, it is reasonable to think that we will not return to the era of quantitative easing that resulted in historically low mortgage interest rates in the 2010s. At the same time, there are too many unknowns to forecast rate trends with certainty.

What does it mean? We can still look at the market, but with broader “what if” lenses.

Scenario 1 & 2 - If interest rates increase, securing funds for home purchases becomes more challenging for consumers, with unattainable liquidity requirements. In this scenario, customising mortgages to borrowers also makes more economic sense. If interest rates stabilise, we are in a similar just less extreme scenario. Customers will try to settle for “the new normal”, with higher liquidity requirements and Debt-to-Income (DTI) ratio. Systemic risk will be less visible but still significant in short-term fixed-rate markets. For instance, in the UK, by the beginning of 2027, at least two million borrowers are expected to face an increase in annual mortgage costs of more than €4,200 - over 10% of median household income. Government schemes and building savings initiatives will be key to supporting first-time buyers and sustaining the housing market. Product flexibility and tailoring increase. Failure to address this issue could lead to trends similar to those observed in Switzerland, where the average age of borrowers (48 years in CH vs. 31 years in the EU) increases, and overall homeownership decreases (40% in CH vs. 70% in the EU).

Scenario 3 - If interest rates decline: funding for home purchases becomes more available. Only limited recovery might be expected in the mortgage market, far from the 2020-21 “golden years”. Shaken by uncertainty, first or second-time home buyers will remain very cautious. In parallel, we expect a significant push for consumers to refinance the loans they closed in 2022 and 2023. This will be especially true in markets such as Belgium, Denmark, Spain, Germany, Hungary and the Netherlands where borrowers typically fix interest rates for longer than 5 years.

An uncertainty guidebook

What do the different scenarios mean, in practice for a lender? In our view, different marketing conditions lead to different client needs which will lead to a significantly different mortgage process.The Oper’s mortgage digitization matrix (see annex 1), highlights this juxtaposition. But, for an easier read of 2024, below we provided a simplified extract.

In a high-interest rate climate, focus on ”tailored” advisory for low-volume, high-anxiety solutions.

Facing complex and tailored products, personalized mortgage advice is paramount to address borrowers’ anxiety. The best-in-class end-to-end advisory is a “deal winner” for any lender. Mortgage advisors must navigate not only a variety of financing products but also new forms of public and grant support aimed at assisting first-time homebuyers and other incentive schemes encouraging households to transition to homeownership. Additionally, these fiscal aspects need to be considered within the mortgage advisory process.

Low volumes are only partially offset by the attractive unit economics of high-interest tailored products. Retention and cross-selling become critical. Acquisition costs are extremely high in a “personalized advice” market. Lenders must devise strategies for short-term cross-selling and long-term client retention to justify the acquisition costs. Digital solutions should be catered towards pre-filtering qualitative mortgage prospects, de-complexing for advisors and enhancing cross-selling. The focus is on supporting the “human” expertise with real-time data and precise product information to ensure holistic and comprehensive advice.

In a lower interest rate climate, focus on “standardization” and “efficiencies” for high-volume, low-anxiety products.

Facing a refinancing wave, standardization, speed and low costs are paramount. Refinancing clients are experienced mortgage buyers with relatively low anxiety. Low rates are the deal winner. Short time-to-yes and a light administrative workload are almost “must haves”.We are in a flywheel scenario for lenders. Lenders need to optimize the advisory and approval processes to optimize unit economics. Internal efficiencies can unlock “market-winning” low rates. “Market winning” low rates can ensure high volumes, further improving unit economics.Digital solutions should be catered toward “efficiencies”. On the one hand, “human” touchpoints should be optimized in favour of borrowers-facing digital solutions. On the other hand, approval processes should be digitalized and automated.

In conclusion, as the European mortgage market navigates through these turbulent times, the ability to adapt and innovate will be crucial for lenders. By embracing digital solutions and fostering a culture of resilience and flexibility, lenders can better serve their customers and navigate the uncertainties of interest rates and market demand. The future of digital mortgages in Europe will be shaped by those who can respond dynamically to changing conditions, ensuring that homeownership remains accessible and sustainable for all.

To explore more market trends for 2024 in detail, we invite you to download the full report. Gain a clearer understanding of the challenges and opportunities that lie ahead, and equip yourself with the expertise to navigate this changing landscape:


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