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Government keen lenders include ‘rent track record’ in decisions

  • 21/09/2022
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Government keen lenders include ‘rent track record’ in decisions
The government has said that it wants to encourage mortgage lenders and others to include a borrowers’ rent track record in lending decisions to allow more first-time buyers onto the property ladder.

Financial secretary to the Treasury, Andrew Griffith, said that the government was “committed to helping as many first-time buyers as possible get on the housing ladder”.

As part of that, he said that a “history of paying rent” could be able to help more first-time buyers.

He noted that in 2017 the government had launched its Rent Recognition Challenge, which was a £2m competition challenging UK tech firms to “develop innovative applications to enable tenants to record and share their rental payment data with lenders and credit reference agencies”.

Griffith said that the three eventual winners, Credit Ladder, Bud and RentalStep, were all using technology to verify and record tenants’ rental payments

He concluded that the government would “continue to work with mortgage lenders and others to encourage rent track record is used in lending decisions”.

The response was to a question from Tracey Crouch, Conservative MP for Chatham and Aylesford, about whether the Treasury would assess the merits of mortgage lenders using rental payments to assess affordability for first-time buyers.

According to Spare Room, the average rent in the UK is £606 per month, and excluding inner London it is £535 per calendar month.

Octane Capital figures, which collated data from the UK House Price Index and the Building Societies Association, said that average monthly payment for a two-year fixed rate at 75 per cent loan to value was £1,098. This is based on an average rate of 3.51 per cent and average house price of £292,118 after deduction of a deposit.

Lenders have traditionally been hesitant about including rent in affordability assessments, according to sources.

Some pointed to challenges in evidencing rent payments and its lack of inclusion in credit scores.

Other suggested that rent was a shorter-term commitment, and did not include maintenance of a property, so may not as accurately reflect their ability to hold a mortgage and manage a property.

Rental payment inclusion in credit scores could be beneficial

Brokers said that the move it could be beneficial for first-time buyers, especially if it was included in credit scores.

David Hollingworth, associate director for communications at L&C Mortgages, said that giving lenders “additional flexibility” to consider rental track record could theoretically help them lend a little more, but “affordability will remain the primary test”.

He continued: “The alternative way that rental track record could help first-time buyers is in being taken into account for credit file purposes. Credit reference agencies have already started to work on harnessing this info, which could help borrowers build track record on their file.

“That could help to give additional weight to their file and ultimately bolster their score with a lender. Although indirect that could improve their chances of getting the mortgage that they need although that could equally have implications where rent isn’t paid on time.”

He said that the challenge was how to collect the data on a large scale, but services like Credit Ladder used open banking to report rental payments to credit reference agencies.

“Otherwise, lenders may need to use a more manual assessment of bank statements so any flex may lend itself to those lenders that are happy to take a more individual approach.”

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said that track record of rent payments could help bolster credit scores if they were included, and consequently would “help a lender decide if they should lend to you, rather than how much they should lend you”.

He continued: “The issue with including rental payments in this is a lack of data; rental payments are not included within credit bureau information which lenders use to generate their individual credit scores, and I cannot see, unless forces landlords to submit data, why that would change.”

He added that rental history would have to be assessed manually, which lenders may not have the capacity to do.

Rob Peters, principal at Simple Fast Mortgage, added: “Lenders can’t realistically take rental payments into account unless rental payment data is registered at dedicated bureau where it could be checked centrally.

“Much the same as credit agreements are registered at credit reference agencies. However, my understanding is that the associations that represent tenants were against this move as they did not want missed rent payments to go against tenants when applying for credit or a mortgage. It’s a two-way street.”


Affordability concerns

Jamie Lennox, director at Dimora Mortgages, continued: “The big issue with going down this route is a tenant isn’t responsible for maintaining the property. Therefore, being able to just afford the rent is not enough to demonstrate the ability to pay a mortgage.”

He added that it was important to consider stress testing, as interest rate rises and their impact on mortgage pricing could mean that people could become “overstretched financially”.

Lennox noted that it was easier for renters to serve notice and find an alternative property, whereas selling a property was more complex.

“The concept would work if rates never changed and there was never a recession, but these two can’t be guaranteed and therefore I don’t see this as a viable solution in the long run”.

Lewis Shaw, founder and mortgage expert at Shaw Financial Services, said that when the Mortgage Market Review was undertaken it laid down “specific rules” on affordability, so it was measured on income and expenditure to be “fair across the board”.

“If you consider the divergence in rents across the UK, it would be impossible to draw up a set of rules that were fair and equitable. Not to mention it would be very easy to circumnavigate affordability requirements if all you needed to do was find an expensive home to rent that was equal to the mortgage you wanted.”

He added: “While it sounds like a good idea to factor in rental payments, it leads to excessive borrowing and a repeat of 2008 all over again. If younger people want a solution, it’s to put pressure on politicians to build more affordable houses.”

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