Having initially joined residential mortgage lender Gen H as Chief Commercial Officer, in his current role as CFO Graham McClelland’s responsibilities include developing the business’ growth strategy as well as overseeing performance management, financial reporting and investor relations. Having graduated from the London School of Economics and Political Science (LSE) with a BA in History, Graham began his career at Merrill Lynch in 2006 before spending nine years at Goldman Sachs as a Managing Director within the Financing Group. In 2018 he took on another MD role within Morgan Stanley’s Global Capital Markets business before moving to Gen H in early 2021.

Paul Riseborough: Welcome Graham. To kick things off, let’s touch on what made you shift direction after 15 years in investment banking to start working for a company like Gen H.

Graham McClelland: I wanted to do something that I felt passionately about, and that was good for the consumer and for society. When I met Will [Rice], Gen H’s founder, the business was about a year and a half old and had lent nothing, but had a very clear ambition of creating a world in which more people own their own home. Homeownership is the key way that individuals acquire wealth in the UK, and it is also really important for building a sense of community.

But how do you broaden access to home ownership when asset prices have risen a lot quicker than wages, and it has become more acceptable to own multiple properties, which obviously has a knock-on effect of creating more landlords and fewer opportunities for homeowners? That remains a huge challenge in the UK, as it does in many other parts of the world, and it really resonated with me. 

Paul Riseborough: Gen H describes itself as a “mission-driven mortgage lender working to transform the housing market”, so give us an overview of how the company does things differently. 

Graham McClelland: We innovate and focus on doing things that others cannot. We very much pride ourselves on being a technology company, and we've built what is still the UK's only end-to-end new mortgage platform. It does everything from customer acquisition – can we lend to you or not – through to underwriting and then servicing. That allows us to consistently and reliably deliver better customer outcomes, which means responsibly lending people more money. 

What if someone can get the house they couldn't otherwise afford, or afford a slightly bigger house so that they only have to move once rather than twice? How do we reach customers that can't otherwise get access to the market? For us, that’s about affordability and it’s about recognising the reality of the modern working world. 

The vast majority of mortgages in the UK go to an individual or a couple who are employed and have a regular monthly income from that employment. But there is a growing minority that have other forms of income, or other living setups – for example, three friends living or buying together, or someone who has a more irregular, side hustle-type income. That's where we step in: getting those people access to homeownership earlier than would otherwise be the case – or making it possible where it wasn’t before.

Paul Riseborough: In terms of your business model, are you a technology platform that lends other people's money and charges a margin for that? Or are you actually a lender that has a funding line from a partner and you make a return on that lending, and return some of it to the partner?

Graham McClelland: It is based around funding partners rather than counterparts. We're looking for multi-year commitments where we develop lending products that we think are beneficial to our customers and fit within the risk appetite of a partner’s balance sheet.

We effectively guarantee to deliver a certain level of blended return to our funding partners. We'll then craft the lending around those parameters, and they will pay us fees to do so – an origination fee of sorts. So we sell the loans above par. From the point of view of the customer, they have a Gen H mortgage and it doesn't matter who's funding it on the other end. If they've got a problem, or they just want something simple like an annual statement, that all goes through us and we get paid servicing fees to do that.

Our philosophy on lending has always been that in the UK at any one time there are 100 mortgage lenders. Obviously the Big 5 or Big 6 have reasonable businesses making good money, and there's also various specialists that have built good niche businesses. Some of the larger building societies have good lending platforms.

Then you're left with let's say 50 balance sheets in the UK, from the very smallest of our partners, Penrith, through to some pretty big £4-5 billion balance sheet institutions that want to provide capital towards owner-occupier mortgages – but are finding it increasingly difficult to do so. Our bet has always been that we can work with some of those institutions to solve a problem for them, and in so doing build our business.

Paul Riseborough: And what is the problem that you solve for them? 

Graham McClelland: We allow them to put capital to work on mission-aligned lending, and that mission is about creating homeowners. And we do that for what I would argue are superior risk-adjusted returns to those they could generate themselves.
 
Most of them will have found a niche – agricultural lending, self-build or small residential building projects, for example. We allow them to focus on what they're good at, but provide them with the returns and deploy the capital so they can grow and they can survive in an increasingly challenging environment. 

Or with the bigger building societies, who are on a transformation journey of their own and likely looking to change the technology stack that sits behind their own mortgage lending, we can act as a bridge while they work through that, deploying capital through us. We give them high quality, relatively high-yielding assets while they focus on what they're going to do next. The other pool is the neobanks. We allow them to acquire assets that they can't otherwise get their hands on and deploy the capital to help drive their returns. 

Paul Riseborough: So you're solving a supply-side problem for them, plus there's better risk-adjusted returns… When it comes to the design of your products, your risk appetite to lend in certain segments, and your policies around how and to whom you'll lend, how do you prioritise?

Graham McClelland: While it varies month on month, 40% of our lending is our income booster product, which supports affordability by allowing individuals to be on a mortgage for a property they don’t own. That type of lending performs exceptionally well, perhaps unsurprisingly. Our typical customer profile is a thirty-something couple with parents aged between 50 and 60 years old who own their own home outright and who still have income, and so are able to use their relatively privileged position to support their children.

Paul Riseborough: That feels significant in terms of the potential for intergenerational wealth transfer.

Graham McClelland: Absolutely. The other 60% of our lending is about making policies work smarter. In the main, a customer landing on our doorstep will fall within two or three of our policy edges. It might be to do with their form of employment, or the fact they were not born in the UK. Or it may be a combination of higher LTV [loan-to-value] and being self-employed. Those factors are not necessarily risky in themselves – but they're sufficiently on the edge of many lending policies, meaning that they fall outside the scope of a Big 5/Big 6 lending machine. 

I don't see gig-based or independent contractor-type employment reducing, in fact there's a whole lot of people who really embrace it. The pressure for the big players is their mortgage lending business is relatively low-margin and high volume but with very high fixed costs. So they're increasingly motivated to focus on ‘uncomplicated’ customers that can be pushed through the process very quickly. 

So the pie of opportunity that we're looking at – in terms of people with ‘non-standard’ income profiles – is growing, while the appetite among High Street lenders is shrinking. So there's a real tailwind for us, and that's going to remain for a while. 

Paul Riseborough: You currently have close to 100 people in the business, and I understand the vast majority of them don't have a mortgage background – or at least they didn’t until they joined Gen H. How do you decide which people to take on? What do you look for in a Gen H employee? You began lending in October 2020, and early in any organisation’s life you really need people that possess a certain resilience to deal with the inherent volatility and challenge.

Graham McClelland: We try not to be at all dogmatic about who we hire. To be a Gen H employee, you need to care about what you're doing, and be curious about how it all fits together. For example, we favour cross-stack engineers rather than people focused on one area of coding, as we try to make sure that everybody is across everything. There are obviously exceptions to that – we have mortgage advisors in the business and they need to be qualified and have experience, likewise our compliance and risk professionals, and some of the credit and underwriting folk.

But I've been very open to hiring people without a finance or markets background who are curious and creative in how they approach problems. As is the case in a lot of startup environments, you need an attitude of getting stuck in and being a problem solver. So we hire quite gritty individuals who are willing to put up a fight, and for whom the fight itself is of value. 

Quite a number of our people are into ultra running or ironman triathlons, or just like feats of human endurance in general… There’s clearly an element of challenging themselves involved. But ultimately they're here because they love what we're trying to do, the human side of it. The mission is key – that what we are doing can genuinely be life changing for people in a really positive way.



Paul Riseborough: You said that to enter this market you had to do the hard yards of building an end-to-end origination and servicing platform. So to some degree the barrier of entry in this market is relatively steep, but there’s also the likelihood that the marginal cost involved is going to come down as platforms become easier to configure. So are we now in an era where there can be more Gen Hs?

Graham McClelland: I'd love it if there were. The market is so big I don't see it as competition in a traditional sense – it's not like the market can't sustain more of us. In fact, the more people knocking at the door, the more that will help with our biggest challenge, which is capital and availability of funding to drive the lending that we want to do. 

But there are barriers to setting up a business like ours, not least the regulatory environment in which we operate. I'm a big fan of the [UK’s] Consumer Duty and what it's trying to do, even if I'm not sure it necessarily always achieves it. I like the idea of consumer-led data at the front of decision-making in financial institutions. But it's not easy, particularly as a small institution starting out. Getting FCA approval, putting in place the governance structures and appropriate levels of risk control and risk oversight – the cost is high. 

The other big barrier is needing a relatively low cost of capital to lend, and that's not available today to a firm that is starting fresh. Obviously we work closely with balance sheet institutions who are lenders. They have their own risk framework that we need to fit inside, which is perfectly understandable. But even when you're going to non-lending capital providers, you're reliant on some model built by somebody at S&P or Moody's years ago. That really has a direct input on how you lend, and particularly how you do things like credit scoring. By having more people in the market, you'll start to open up more capital, and to see people being more open to approaching risk in different ways.

Paul Riseborough: What is your attitude to technology? You’ve built plenty, so how do you think about it in terms of the growth of the business? How do you make technology choices? We’re seeing exponential opportunities in new technologies like GenAI. For a firm of your scale that must present both opportunities but also a challenge in terms of making the right choices.

Graham McClelland: Yes, it does. How we approach the challenge has changed over time as both the business and the environment have changed – I’d agree this is the beginning of a new paradigm. At the start it was a case of looking at what we might buy off the shelf or plug in, but we decided early on that we were going to have to build this platform ourselves. We are constantly evaluating our choices in that regard, but for simple things like credit scoring we know we could build something that is more appropriate for our customer base. 

As we've matured, we've learned to keep things simple, keep them so they are interchangeable, easy to develop. Ultimately, could this become a software as a service? Certainly we have built a lot of proprietary knowledge and intel that would be of benefit to others. So could we monetise that? As for AI, you have to be careful with how you deploy it – a big part of Gen H is the personal service we offer – but we have deployed AI in certain aspects of our underwriting, there is a lot of opportunity to use it in a smart way there. 



Paul Riseborough: If you were to look forward three years, what do you think the big challenges and opportunities are for Gen H and for the broader mortgage industry?

Graham McClelland: A key challenge is there has been very little product innovation. Ultimately you're lending money secured on a bunch of bricks and mortar. So what can you do? The starting point for me is the changing profile of the ‘average’ UK citizen. What can you do to enable those people to get an opportunity on the housing ladder? That requires thinking about being smart around deposits and deposit requirements, being smart around affordability, how the product is structured, and being open to lending to a broader range of people.

The big mortgage lenders lend a lot of money very appropriately to a tremendous number of people and deliver a great service. But they have no motivation to move further towards the margins. So how do you incentivise those big players to make some of their capital available to lenders like us? I have plenty of ideas about how you might do that. But ultimately if you want to transform the UK mortgage industry, that would be the one thing I would suggest.

Paul Riseborough: I guess an inflection point will come where the marginal cost associated with more personalised lending is going to come down?

Graham McClelland: I agree 100% with you, but I'm not convinced the larger institutions are going to drive that. I'm excited by some of the things the Government are talking to the regulator about – regulation is important, but there is a line to be drawn, and I think it's drawn on the wrong side currently. If we were to take capital from a Big 5 or Big 6 lender, the level of scrutiny that would come onto them from the regulator for our actions – even though we are responsible for those actions – would be a huge pressure for them. 

Dialling down some of those pressures would really drive innovation. You need startups to come in and drive change, and the bigger institutions will either follow or buy or capitalise – and then you'll get better outcomes for customers across the board.