With a host of lenders poised to enter the mortgage market over the next few months, differentiation between what each will offer is certain to be central to their success. While some are focusing on enhancements made within the technological arena, other are centring their proposition on product pricing and speed of service.
However, another business model, currently in operation in the loans sector, has been touted as an option for mortgage lending in the future. Currently used by Zopa.com, the lending strategy focuses on ‘cutting out the middle man,’ enabling the firm to cut interest rates by putting people who want to lend in touch with credit worthy people who want to borrow.
James Alexander, chief financial officer at Zopa.com, argues that many people do not like dealing with establishments like banks and would rather borrow money from other people so they can see where there money is going to and coming from. He says transparency is key to the success of Zopa. “Our members say we are more ethical than banks, but for me, I’d say we are a fairer, smarter and more transparent lender.”
A cheaper alternative?
Launched in March 2005, by the team that founded Egg, Zopa.com already has 80,000 members and has turned over several million pounds of business. Alexander says customers are choosing Zopa because it is, on average, 30 per cent cheaper than other lenders. Zopa also does not penalise borrowers who want to pay their loans back early.
As for the lenders, Zopa.com offers an average gross return of 6.8 per cent, will only lend to credit-worthy applicants and spreads loans of £500 or more across at least 50 borrowers.
Currently Zopa.com will only lend on personal loans up to £15,000, but with similar online lenders launching in America, such as Prosper.com, Alexander predicts the Zopa model of lending and borrowing from individuals will be tailored for mortgages at some point in the future. “We have no concrete plans to do mortgages, but there is no reason the Zopa model couldn’t be used for them. At the moment, doing an end-to-end mortgage application online is quite a complicated process and we are not quite ready yet.”
Commenting on Zopa.com as a possible alternative for the future of mortgage lending, Formula Mortgages managing director, Fiona Hall, agrees the model could prove popular. “The phrase ‘it sounds too good to be true’ is the first thing that springs to mind. However, provided it meets the necessary regulatory approval, we all operate in a free market and any new concept that adds choice for consumers should be welcomed. I think it needs to be scrutinised very carefully, but in principle, provided customers have the proper consumer protection as with other forms of lending and borrowing, then if this is going to represent competition to existing lending, all I can say is, bring it on.”
Development
However, Lilo Penri, PR officer at Principality Building Society, views Zopa.com as more of a ‘chip off the old block’ rather than a new form of lending to be reckoned with. “What sounds like an innovative way of borrowing money and earning interest on your savings, it actually based on how building societies were started, with a group of individuals helping each other to buy a property and in the longer term earn interest on their savings. It will be interesting to see how this company develops.”
Customer focus
The Zopa model is one that has proved popular within the loans market. However, doubts have been raised as to its possible introduction in the mortgage market, with many indicating that, due to the scale of the house purchase process, many borrowers will want to speak to an intermediary before making any kind of decision. Jennifer Holloway, head of media relations at Skipton Building Society, says: “Since regulation, our feeling is that more people go to intermediaries because it takes more time to go directly through the lenders and you want trusted, independent advice. The majority of borrowers are not financially canny. I can’t see them going for Zopa.com for their mortgage.”
Susie Ratcliffe, PR officer at Chelsea Building Society, adds: “Should Zopa decide to go into mortgage lending, this concept may suit some individuals. However, we believe our customers appreciate dealing with a traditional, safe organisation and that they enjoy the reliable face-to-face contact we can offer.
“If Zopa.com was to choose to go down this route, the concept is similar to that of mortgagebundles.com. However the loan would be with individuals as opposed to lenders, so we would have to question whether individuals have sufficient funds to cover a mortgage.”