In an era of digital transformation and evolving customer expectations, the UK mortgage lending landscape is undergoing a significant shift. At the forefront of this change is the rise of product switching, reshaping how lenders retain customers and navigate market volatility. This article explores how product switching is revolutionising the mortgage sector, backed by the latest data and expert insights.

The UK Mortgage Market Overview

Before delving into product switching, it’s crucial to understand the scale and recent fluctuations within the UK mortgage market. As of February 2024, mortgages constitute the largest portion of outstanding lending to households, reaching nearly £1.45 trillion and vastly exceeding consumer credit, which stood at £222 billion in the same period. Despite this substantial figure, the mortgage market experienced a notable decline in 2023, with the total value of mortgage lending dropping by nearly £100 billion compared to the previous year. This sharp decrease was driven by a significant rise in mortgage interest rates, which made borrowing considerably more expensive. Consequently, gross lending to individuals in 2023 totalled just £225.1 billion. However, the overall mortgage lending market in the UK is anticipated to recover, potentially reaching £253 billion and with 1.6 million households on an expiring fixed rate deal by the end of 2024, lenders are shopping around to get the best deal.

The Product Switch Revolution

Product switching is a critical tool for moving existing customers to new mortgage products at the end of their initial deal period. While product transfers don’t directly account for new lending, they are a significant part of mortgage market activity. The Financial Conduct Authority (FCA) includes product transfers alongside new sales, remortgages, top-ups, and alterations in their mortgage sales data.

One indicator of the importance of product switching is the improvement in average retention rates, which rose from 62% to 66%. Mainstream banks and building societies led the way with a 77% retention rate, while smaller building societies and niche lenders increased significantly from 36% to 47%.

Market Dynamics Driving the Shift

Several factors contribute to the increasing popularity of product switches:

1. Economic Uncertainty: With the Bank of England base rate reaching 75% in November 2024 and the Consumer Price Index (CPI) peaking at 10.4%, many borrowers are seeking stability through fixed-rate products. Product switches offer a straightforward path to securing these rates, helping customers manage rising costs and lenders maintain their loan books.
2. Regulatory Changes: The FCA’s Consumer Duty, which came into force in 2023, emphasises fair value and good customer outcomes prompting lenders to improve their product switch offerings to ensure compliance and customer satisfaction.
3. Digital Transformation: The adoption of digital platforms has seen adoption of new flexible, streamlined tools to support the product switch process, including tools to support lenders with complex product switch circumstances, making it easier for borrowers to explore and choose new products with their existing lender. As evidence mainstream banks and building societies have reduced their average processing time from 14 days in 2022 to 10 days in 2024.

The Benefits of Product Switching

For Lenders:

• Customer Retention: Help lenders maintain their loan books in a competitive market, as seen in the rising retention rates.
• Cost Efficiency: Retaining existing customers through product switches is more cost-effective than acquiring new ones.

For Borrowers:

• Convenience: Product switches often require less paperwork and can be completed more quickly than remortgaging with a new lender, especially in an environment where 91% of mortgage applications are processed through intermediaries, which can be actioned in less than an hour at a time convenient to the lender.
• Potential Savings: Many lenders offer competitive rates to existing customers to encourage retention, providing a straightforward path to better financial outcomes with less fees incurred for a product switch, compared to a remortgage.

The Future of Product Switching

Looking ahead, several trends are likely to shape the evolution of product switching:

1. Advanced analytics: Enabling lenders to offer more personalised product recommendations, potentially increasing the appeal of product switches.
2. Open Banking Integration: The integration of open banking data could streamline the product switch process further, allowing for real-time affordability assessments in cases where a lender requests additional lending.
3. Green Mortgages: With the UK government’s focus on net-zero targets, product switches to green mortgage products are expected to gain traction. The Green Finance Institute has been promoting the adoption of green mortgages, which could become a significant factor in product switch offerings.

As digital transformation continues to redefine the lending landscape, platforms like the SBS Mortgage & Savings Suite are playing a central role in helping lenders adapt. By integrating automation and self-service tools, these solutions streamline the mortgage process, allowing borrowers to manage their mortgage terms with ease and reducing the operational load on lenders. Such innovations underscore a broader shift toward agile, data-driven approaches capable of adjusting to market shifts and evolving customer expectations.

In an industry facing economic fluctuations, product switching supported by solutions like SBS offers a pathway for banks and building societies to maintain customer loyalty, enhance operational efficiency, and build resilience. This evolution not only strengthens lender-borrower relationships but also contributes to a more stable and responsive mortgage market, meeting both current demands and future challenges.