Should lenders use rental payments in affordability calculations for first-time buyers?
Danny Belton, head of lender relationships, Legal & General Mortgage Club
The cost of renting has increased over the past two years as potential first-time buyers are taking longer to save for a deposit and in some cases, even prevented from doing so.
As a result, there is a growing number of tenants who would pass a lender’s affordability criteria, but don’t have enough funds for a deposit. Even with existing schemes such as Help to Buy and shared ownership in place, not all properties can be bought using these. Whilst the Bank of Mum and Dad is playing a significant role in helping loved ones onto the property ladder, accounting for more than one in every four transactions, not everyone is fortunate enough to have this support.
Rental demand is increasing. Yet the layering of tax and regulation changes over the past few years – and fewer landlords buying or entering the market – means the opportunities to rent are decreasing.
In some cases, good and reliable tenants may have to leave their home because their landlord decided to sell, and may be unable to find a similar rental property due to affordability and/or cost.
While good customers on paper, in a worst case scenario, these tenants could become homeless unless we find a way to use rental payments as part of affordability measures.
The issue of affordability isn’t going away any time soon, and as such, we need to see greater innovation from the industry.
We’ve seen Experian launch The Rental Exchange, providing tenants an online proof of identity, so they can build a positive credit history, and The Cambridge Building Society, for example, has recently introduced its First Step product. Designed to support those who can’t rely on financial help from family, this product enables first-time buyers to purchase a property with as little as a 2 per cent deposit. Hopefully, more lenders may follow suit.
Martin Cheek, managing director, SmartSearch
In theory, I do think that rental payments should be considered in a credit report, but in practice, it is simply not viable. The challenges faced in sharing this much data on a regular basis are huge.
For example, we have so many different ways in which people rent, that it is a minefield of information.
There is social housing data to collate, lettings agents, private landlords, and my fear is that unless they are forced to share this data, there is no incentive for them to invest any time or money in doing so. And you may get to the point where rental is considered in credit reports, but renters won’t be able to get their landlords to share it.
So, unless it is universal, and everyone’s rental data is shared, it is worthless.
And in fact, if we get to a situation where some people’s rental data is shared by some landlords, but not all, it could actually do more damage than good.
For example, you have two people both wanting to rent the same home. The first person has an impeccable record in making payments, but it has not been referenced on their report. The other missed payments with one landlord, which has not been shared, but has a good record with a previous landlord, which has been.
The person with the worse record could end up getting the house, who it turns out, is actually a bigger risk.
The only way that this would work is if it is made a law and all rental data is shared.
Currently, landlords have to ensure that any tenant has the right to reside in the UK. This is the law.
The only way I think using rental data in credit reports could work in a positive way is to mandate it in the same way.