Navigating Interest Rate Changes: Optimizing Mortgage Product Planning

With the rapid rise in interest rates impacting global economies since 2022, consumers and many homeowners are being hit hard. We’re spending less and shopping around for better deals from financial institutions. In turn, banks face lower demand, payment defaults and an increasingly competitive landscape. There’s an urgent need for banks to act and to do it fast.

In this two-part exploration of the key challenges facing banks in the light of the sharp rise in interest rates, we talked to financial planning and analysis expert Ewan Smith.

We wanted to find out: How are banks planning for change?

As an experienced business leader with a strong track record in financial services, Ewan has held several senior roles including Head of Strategic Initiatives with HSBC, before joining Bedford Consulting, a leading Anaplan solution provider, as a Financial Planning and Analysis Specialist.

In part one of this blog, he shares insight into some of the key questions arising in the banking world today, including:

• How are banks approaching strategic mortgage product planning?
• What solutions are available to help banks respond to these complex challenges?
• How are banks improving their resilience through stress testing?
• What are the key metrics for optimizing mortgage product offerings?

In part two, we dig deeper into how banks are aligning mortgage planning with wider business strategy and share actionable insights for improved collaboration.

While our discussion focuses on the complexities of mortgage management, it also encapsulates the broader strategic landscape that banks must navigate . The solutions discussed in this blog help tackle a universal challenge that all banking product managers experience.

Challenges in Mortgage Product Planning

Q: With interest rates on the rise for some time now, how are banks approaching the challenges of strategic mortgage product planning and scenario analysis?

A: From conversations we’re having across the industry, we're seeing this as more of a hands-on, operational challenge than a purely strategic one. Banks are grappling to understand their mortgage holdings and how they react to changing interest rates. The quick changes in available products indicate that banks are being cautious. They might be streamlining their offerings due to limited data and many uncertainties.

• Stress testing has been a mainstay in banking for a long time. It helps banks plan for various situations over long periods. Stress testing supports banks modeling of the broader impacts to their portfolios. This happens over a few months and is not done in real time, allowing for introspections and considered responses. The markets change in real time so operational decisions are more challenging and the stress test helps but it doesn’t have all the answers.
  
• Recent shifts in interest rates highlight a gap: banks need a faster way to test real-life scenarios for better decision-making and price setting. A rapidly changing environment means removing the relative luxury of time to consider decisions and places the emphasis on being able to rapidly collect and analyze data to make the best decisions. This is a bigger challenge due to the need to consult various specialist functions within the bank and agree on outcomes.

The real challenge for banks today is blending long-term planning with immediate action. While many have big-picture plans, quickly interpreting fresh data and making decisions in a fast-changing market is tough.

To put it simply, it's about balancing long-term goals with immediate demands and having time to execute, while considering the broad range of impacts.

Dynamic Portfolio Management

Q: With interest rates constantly shifting, how can banks efficiently adjust their mortgage product portfolios and respond to these fluctuations?

A: There are very few out-of-the-box solutions that effectively model data for pricing decisions in a fluid interest rate environment. Typically, banks use a mix of tools, or even Excel for modeling, which can have limitations when it comes to flexibility and security. Success depends on how easily they can access data from their main product systems to model and share with necessary stakeholders.

The main issue is adjusting portfolios to the evolving interest rate scene. Analyzing a bank's existing client portfolios, containing both fixed and variable products, is essential alongside understanding impacts on the back book, while pricing effectively to build or maintain market share while effectively managing risk.

The focus then moves to the front book, which includes new or refinancing clients. Getting a grip on the patterns of renewals, client stickiness, portfolio migration to competitors for better rates, and switches between fixed and variable rates is crucial. It's also vital to understand cost implications and the availability and mix of funds. However, connecting all these factors quickly requires coordination between various departments, like mortgage and liability product management teams, ALCO, balance sheet management, and treasury.

To effectively handle these dynamics and align teams, especially around risk, takes concerted effort. Some banks are turning to modern financial planning and analysis (F&PA) tools like Anaplan for this purpose. By using these tools to consolidate data, model scenarios, and foster teamwork, they're better positioned to rapidly make informed decisions based on a common data set all parties’ trust.

Stress Testing

Q: How can banks leverage tools to improve resilience and meet the challenges of fluctuating interest rates, especially in stress testing?

A: A critical aspect of addressing the challenge of fluctuating interest rates is streamlining forward-looking activities, such as planning, forecasts, and stress tests. Using consistent data sets and understanding business drivers becomes crucial.

There's a noticeable advantage when banks can set up business models that adjust as business conditions change. This approach ensures that plans, forecasts, and stress tests are more efficient to execute, especially when changes in business drivers are considered. One major hurdle is the management and alignment of these complex business drivers to ensure consistent application across teams.

Many banks encounter challenges in maintaining accurate business models, especially when heavily relying on tools such as Excel. However, tools like Anaplan, that facilitate comprehensive model audits,  allow for a more focused management of business drivers, reducing the potential for calculation errors and streamlining data processes.

Unlike traditional stress tests, Anaplan allows for more assertive scenario modeling, providing a more accurate reflection of reality. This enables banks to manage their balance sheets based on a deeper understanding of market dynamics and competitors' probable responses, in contrast to rigid rule-based assumptions.

In short, to build resilience, banks should prioritize simplifying processes, ensuring accuracy, and promoting informed decision-making. This will enable them to nimbly adapt to shifting economic conditions and successfully navigate the intricate terrain of financial planning in uncertain times. Tools that help in these areas can serve as valuable allies for banks in this endeavor.

Real-Time Insights and Strategic Agility

Q: How can banks strategically plan mortgage product offerings across different interest rate scenarios?

A: Amid fluctuating interest rates, strategic planning mortgage product offerings across different scenarios becomes paramount. Banks must venture into a broad spectrum of "what if" situations, from the most probable to the “black swans.” Understanding how these impact their business enables them to proactively plan business responses more effectively, with real insights into how the business is likely to be impacted.

Being prepared for rare "black swan" events without investing significant analytical time and effort offers competitive advantages. While infrequent, these rare events have the potential to drastically reshape the financial landscape. Navigating these uncertainties successfully is critical and requires advanced tools that can run multiple scenarios, based on variable business and market drivers, and provide timely and transparent insights.

Advanced F&PA solutions such as Anaplan offer the ability to handle these complexities. These tools offer strong capabilities in unifying datasets and adjusting variables, allowing banks to approach a wide array of scenarios with confidence.

Beyond analysis, they offer the capacity to foresee and strategize for potential market upheavals, embedding resilience into strategic planning.

By identifying vulnerabilities early on, banks can formulate robust management action plans. And by rigorously stress-testing mortgage product strategies in various interest rate climates, banks can effectively respond to potential challenges and remain agile and competitive in today's dynamic financial realm.

This capability enables banks to rapidly glean insights and stay a step ahead.

Stay agile and resilient

For banks to remain agile and competitive, they must seamlessly integrate long-term vision with immediate actionable insights.

Tools like Anaplan offer a massive competitive advantage in bridging this gap, offering a comprehensive approach to scenario modeling, stress testing, and strategic decision-making.

In doing so, banks gain greater resilience and ability to respond effectively to market fluctuations.  But there’s more to unpack.

Read Part Two of this blog series where, based on our interview with Ewan, we explore the key metrics banks should use to optimize product offerings and explore the power of collaboration.

Ewan Smith is a finance leader with over 20 years of experience at top global banks including HSBC and ABN Amro. Ewan has deep expertise in financial planning and business modelling and has been leading change and transformation initiatives for five years, helping businesses unlock value for their teams and stakeholders.