Banks and mortgage lenders are set to experience a tsunami of refinance applications in the next couple of years after the value of fixed rate loans peaked at 46% of all lending, well above the typical rate of around 15%.
Fuelled by historically low interest rates and a substantial gap between variable lending rates, the value of fixed interest rate mortgages reached 46% of all home lending, with many to expire from mid-2023 and beyond.
This follows the mortgage industry’s journey of rapid digitisation and simplification, which requires lenders to reassess their current valuation policies and processes. By optimising their valuation mix, lenders using Automated Valuation Model (AVM) estimates, desktop valuations in addition to full in-person property assessments within their risk appetite, are seeing significant benefits in approval times, operational efficiency and reduced cost.
Now, as the market responds to rapid rate hikes and a declining housing market, demand for valuations will continue with an even greater reliance on data-driven, responsive analytical solutions.
Here are five key benefits digital valuations such as AVMs and desktops provide, and why Australia’s banking and finance industry has been so quick to adopt the technology.
Speed
The key ingredients powering the digital mortgage are improving loan origination speed while reducing cost. A combination of Artificial Intelligence (AI) and Machine Learning analytic techniques powering the AVM model, and advanced valuation fulfilment capabilities allows leading providers such as CoreLogic to execute valuation logic to help clients determine whether a mortgage can be written on a property immediately, or whether a desktop or in-person valuation is required.
If an instant AVM is not available or is unsuitable, a valuation request can be escalated to a desktop valuation and this data-powered process can be completed by a qualified valuer within a few hours.
As a result of greater adoption of these solutions, the industry has seen ‘time to yes’ on loans drastically reduced from a few days, to a few hours for desktop valuations and now an hour or less for some banks and lenders.
This turn of speed has produced a huge progress shift within the industry. Speed is as essential in a falling market as it is in times of growth. As property values soften, borrowers still need faster approval times as they look for alternative providers and weigh up their best financial option.
Cost saving
Comparing the average cost of a digital solution - AVMs or desktops - with full valuations allows us to estimate the potential savings each model offers.
Over the past year, CoreLogic’s platforms have processed more than one million full valuations. Even accounting for a 5% movement of this aggregate into desktops and AVMs, would equate to an average operational cost saving for the industry of $9 million.
As part of a suite of valuation solutions, digital valuations are a significant value-add that contributes to the overall cost saving derived from a reduction in processing time. The value of improved customer experience reduces touch points and the number of process steps but also facilitates a stronger relationship between businesses and consumers.
From an organisational and management perspective, the improved versatility of integration provides better business customisation. Feature-rich flexibility options include regular evaluation, monthly reporting and insight analytics for heightened portfolio oversight and improved risk management.
Efficiency
Not only was there a peak in the proportion of fixed rate mortgages in 2021, the annual volume of sales peaked in December 2021 with approximately 618,000 sales, an increase of 35.9% on the year prior.
It was a year unlike any we’ve seen before in terms of volumes and demand. As a result, the $2.1 trillion mortgage industry had to respond rapidly, turning to new tech-savvy solutions to reduce processing times and improve workflow efficiencies.
A significant gain to come from this has been the customer retention benefits including:
- The elimination of paper verification with automatic rental income assessments
- Provision of hazard and risk insights
- Property value notifications as a loan period nears completion
- Streamlining the loan ‘top up’ process by providing customers with an indicative property value within their banking app
Efficiency targets don’t evaporate, even in a cooling market. In fact, they become more important as lenders compete for new business while focussing on retaining market share and existing quality borrowers. These new benchmarks are already playing a key role in the ambitious growth targets of many lenders determined to secure a bigger market share in the next two years.
Accuracy
More than 90% of Australian residential properties are covered by CoreLogic’s address matching capabilities.
A roadmap of continual refinements to CoreLogic’s modelling coupled with its access to high quality data sources produces higher accuracy and greater confidence in reliable valuation outcomes.
Recent upgradesto home sales data feeds has improved the timely ingestion of valuable price signals into the model, improving any sensitivities to market fluctuations.
An adjustment in the formula to give a greater weighting towards recent sales and additional valuation data from participating lenders, again improves the model’s ability to react in faster markets.
Customer feedback is encouraging and our monthly accuracy reports show the benefits achieved through constant index calibration, hypothesis testing, constant optimisation and testing cycles.
Customer experience
Picture a customer needing only minutes to submit a loan application and receiving approval in less than an hour.
It’s one example of how the mortgage industry has recalibrated in the past couple of years in response to customer demand. This has been possible without sacrificing accuracy or quality, all while significantly improving the customer experience.
We believe in-person valuations will always have their place in the lending space. After all, these specialists contribute years of market experience when evaluating a property in a given location. Their observations and interpretations capture what data cannot.
However, by overlaying human action with data modelling and AI we’re applying a larger volume of information to better understand the potential market risks and likely market value based on previous sales.
This is the ultimate best-case scenario for banks, lenders and consumers, where a combination of modelling, AI and valuer input, can give the best outcomes, improved accuracy, faster turnaround times and greater efficiency.
Important consideration
It is important to understand that usage of digital valuation types is not always appropriate. In some instances, AVMs may sit outside of the usable tolerance due to insufficient data. Additionally, properties that are exposed to environmental hazards or other risks, have very high or low estimated value, or higher risk property use and occupancy need to be subjected to a full on-site review by a qualified valuer. In these scenarios, overreliance on digital valuation types may expose lenders to unwanted risks.
Industry best practice has an appropriate mix of valuation types – digital valuations and the valuation types requiring a valuer to visit the property being valued.
CoreLogic can help lenders optimise their valuation mix by leveraging the best property level insights, combined with automated analytics and digital workflow tools.
Visit our Banking and Finance industry page to learn more.
Meet Eugene Vassiliev
Head of Financial Services Solutions
As Head of Financial Services Solutions, Eugene leverages over 25 years of banking and insurance expertise to lead the company’s strategic initiatives that best position CoreLogic for revenue growth, innovation and great customer experience.
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