It sounds like common sense to say that if you have paid £880 rent a month for a couple of years then you can obviously afford a mortgage costing £880 a month.
And if you live in London or the south-east, you will probably add that rents are so high you can’t afford to save much for a deposit, so you need your good rental payment record to be taken into account in a mortgage application. This is one of the arguments being made in a recent article Proof of rent payments should be allowed as affordability.
But there are a lot of problems with this suggestion.
Paying a mortgage is not the same as paying rent
Your current spending pattern, where your rent is affordable, may not continue when you buy a house. House-owners have expenses, often large, that a tenant doesn’t;
- buildings insurance, service charges, exterior house repairs (roof, damp-course, fences, windows), interior repairs (plumbing problems, boiler etc),
- repairing/replacing white goods, carpets.
In addition to the essentials, homeowners usually spend a lot more on furniture and decorating than most private renters do.
Renters also have a better welfare safety net if they have health or employment problems. For homeowners, the only help is Support for Mortgage Interest (SMI), but that pays a lot less than most people’s mortgages and only kicks in after 39 weeks. People with a mortgage may want to look at Mortgage Payment Protection insurance for cover in the event of employment problems and Income Protection Insurance for cover for long-term health problems. So you either have more monthly expenses to pay for the insurance or a greater risk of defaulting on your mortgage.
And a mortgage is a very long contract. A landlord just needs a reasonable guess that you will pay your rent for a year, a mortgage lender has to be much more cautious looking at a 25 year or longer mortgage. For example:
- you are 57, the fact that you have paid your rent for the last 2 years on time doesn’t say anything about what your pension arrangements will be;
- you switched to being self-employed 6 months ago – a mortgage lender isn’t going to be interested in your previous perfect rental record when you were employed.
A perfect credit record and rental repayment record says very little about whether a mortgage is likely to be affordable for you in the long term. Tighter mortgage affordability standards have been introduced for very good reasons. The Bank of England says lenders have to be sure that a mortgage will still be affordable for you if interest rates go up to 3% over the lender’s current Standard Variable Rate.
It would increase house prices
If you increase demand for something but don’t increase the supply, any economist will say this is likely to lead to increased prices. Making it easier for a first-time buyer to get a mortgage does nothing to increase the supply of housing in the UK.
A Morgan Stanley report The help to buy premium – and its unintended consequences concluded that the price of new builds has gone up by 15% more than second-hand houses because the government is subsiding new builds by 20% with the Help To Buy program. As a result housebuilder profits have jumped – one FT columnist has nicknamed the scheme Help to Buy yachts for executives. As a result, the first time buyers will find it harder to remortgage when the first five years is up as their houses will not have gone up as much in value as they expect.
An HMRC report into the reduction in stamp duty for first-time buyers found a similar result: reducing stamp duty by 1% pushed up prices by between 0.5 and 0.7%. So only a small gain for first-time buyers and a larger transfer of value from the government (lower tax receipts) to house sellers.
So two previous government schemes intended to help buyers have mainly increased house prices. It would also be the expected result if taking rental data into account made it easier for first-time buyers to get mortgages. Another upward twist to UK house price inflation – which ultimately feeds through to higher rents as well as larger mortgages – would be mainly a gain for people who already own houses, not those who are hoping to buy them.
Adding rental records to credit files
There are now at least three firms reporting rents to Experian: Credit Ladder (reviewed here), Credit Builder and Canopy (where this is a side product of their insurance-replaces-a-deposit product).
There are three sorts of problems with these initiatives.
1. Problems about benefits
The delays and problems in claiming Housing Benefit and – even worse – Universal Credit make it routine for tenants to get rent arrears before backdating kicks in. Many tenants may not have complied with the letter of the law because they didn’t understand the letters they were sent, so there may need to be an appeal before a final decision is reached. Is it fair that their credit records should be damaged because of this?
There is also a significant postcode lottery. Local Housing Allowances, Discretionary Housing Payments and the Benefit Cap can vary between regions, councils and even by postcode within a council. How can it be right that someone who has paid their rent on time for years can suddenly have not just rent arrears but their credit rating ruined because the government or their council has made an arbitrary change to the benefit rules in the middle of their tenancy?
A simple way around this would be to say rental records will only be kept by Experian if someone is not receiving Housing Benefit or Universal Credit. But it isn’t likely to encourage mortgage lenders to give rental payment data much weight if only good records are kept. And making that decision could disadvantage single parents, most of whom are women, and the disabled. That potential discrimination may not matter for mortgage applications, but holding rental data on credit records is being promoted as having wider benefits.
2. Problems with landlords
Private landlords have nothing to gain from ensuring the credit record reports are accurate and at the moment there is no effective Ombudsman mechanism as a fallback. Will landlords – private and social – put enough effort into making sure any incorrect markers on credit records are corrected?
Private landlords can simply disappear for months or refuse to do repairs, so tenants often stop paying the rent and, for example, replace the fridge themselves. Legally they shouldn’t but it happens a lot. Should their credit record be damaged?
Private tenancies can have all sorts of odd clauses – I saw one that said the tenant wasn’t allowed to give notice in July, August, November, December or January. I would be surprised if the landlord won a case in court on the basis of that, but if the tenant left “without giving the proper notice” should her credit record be damaged because of a clause that was probably not enforceable?
Even the government has realised the lack of an effective Ombudsman is a big problem for our broken housing market (the government’s phrase, not mine.) Hence the consultation announced in February 2018: Strengthening Consumer Redress in the Housing Market Consultation.
3. Unclear if mortgage lenders will be impressed anyway
I am unconvinced it will make much of a positive difference to large credit applications, especially mortgages. I think Credit Ladder’s statements on its website, where its homepage currently says Access better rates on mortgages, loans and utilities could be politely described as marketing puff – there is no evidence for this.
Conclusion – not such a good idea at all
Homebuyers have different and larger expenses than people renting, so the simplistic I have paid that much rent so I can afford that much on a mortgage may not be true for many people.
Allowing rental payments to influence mortgage lending may also force up house prices, which is the last thing either renters or first-time buyers need. In addition, the proposals so far to add rental payments to credit records have practical issues and there is no Ombudsman mechanism in place to resolve disputes.
The current mortgage affordability criteria may seem unreasonable to someone desperate to get on the housing ladder, but they are there for a good reason.
In 2007 Northern Rock’s 110% mortgages seemed a sensible option to many young people, expecting their incomes and house prices would go up. But that ended badly for many borrowers, with bankruptcy for some and others being trapped by negative equity in a house that was too small for a growing family.
I am sympathetic to young people paying very high rents. But the answer is to build more affordable property, both to rent and to buy. Not to fudge the mortgage affordability criteria.
Poor credit score & want a mortgage
Save a deposit or pay off debt – your options
35-40 year mortgages – be careful!
J. S. says
Im a Metropolitan tenant. I think my credit rating is OK I havent been turned down and got a new phone last month. I dont have problem debts but I’ve got 2 lots of rent owing because of benefit screw-ups as I never got the letters they said they had sent. I think this is a very bad idea.
Nick Pearson says
I can accept the shortcomings in relation to mortgages, although I think the benefits will outweigh the pitfalls but mortgages seem to me to be a side issue. The biggest use of rent payment data would be to allow borrowers with poor CRA histories to get access to lower cost unsecured loans. I’m still at a loss to understand the arguments of critics of this – I can only assume they don’t approve of any sort of borrowing, lower cost or not.
Sara (Debt Camel) says
Well the article was specifically about mortgages.
The arguments around customers with thin credit files wanting unsecured loans are rather different. But
a) they are often too close to the benefits system for comfort and too many end up with rent arrears after the switch to UC who never had them before
b) credit worthiness is not the same as affordability – lenders need to do proper checks and more affordable credit products are needed
c) I no longer trust the motives of many Housing Associations, i do not want to see poor rental payment history causing people to be declined for HA tenancies.
Suzanna says
I think the piece is very straight forward but owning a house isnt all doom and gloom. New houses have less repairs needed. New houses often come with white goods. Government schemes help first time buyers. Owners of houses tend have to have more pride in their property. Owning a house isnt for the faint hearted, but you should learn how to budget and save. So, If you are paying a large sum every month in the form of rent then it makes sense to have that formally recorded. It improves a credit rating. As the writer has pointed out, lenders will look at much more than just a rent payment but the same argument would apply to obtaining any credit having it on your credit file and then something goes wrong. The credit file is impacted. So the argument that if your house purchase hits a problem your credit report is damaged, isnt enough justification to say no to rental payments being logged. I wonder if the writer rents or owns?
Sara (Debt Camel) says
Thanks for leaving a detailed reply.
Yes new houses come with with goods and they also don’t need decorating etc but the home owner still needs to repair and replace them. The question isn’t whether they can get through the first couple of years it’s the whole life of the mortgage.
It isn’t clear how much having rental payments recorded will improve someone’s credit score, at the moment they aren’t taken into account. My guess is that rental payments won’t make much positive difference to anyone except those who have a very “thin” credit record with hardly anything on it – most people buying a house are not in that position.
What will make a difference is any problems with paying the rent. So people with a good record may not gain much and anyone with problems – possibly caused by factors outside of their control with no independent Ombudsman system to appeal to – could lose a lot.
I do own a house, but I have two children in their 20s renting in London, so I am well aware of the problems they and their friends face!
Suzanna says
Take your comments on board. Any regular payment to an agreement just like utility or council tax will have a positive impact on a credit file. It has do due to the legislation around credit reporting. The problem I think you are very right about, is the attitude of lenders in their own in-house credit assessments. If we look at affordability alone then they would have to take into consideration the fact someone has maintained a priority debt without default. On the other hand if they dont manage their other credit lines then it would negate the positive influence the rental payment had. Also, rental is not an unsecured debt it is a priority debt. Mainitaining it demonstrates a positve behaviour which if picjed up by AI data (which is where all lenders are moving to) then the repayment would identify good credit behaviour. My question about the writer owning or buying wasnt meant as an implied insult. It is just that I did own. I sold and now rent and because my rental payment isnt taken into consideration on my credit file, it has dropped points from when I was an owner. So I have seen a derogatory impact on my file because my rental payment isnt in the equation.
Paul Sharp says
Mortgage lenders should find people who have a good rent paying record. But it does not necessarily prove them to be reliable because future financial position can’t be predicted.
Lucy Crofts says
I’d agree with this if it was paying a rent to the same value as a mortgage repayment as in your example but my rent is £1300 a month and has been for 6 years. My friends are paying £600 in a mortgage in larger homes and they are not spending £700 a month in expenses associated with ownership.
Rachel says
Totally agree Lucy.
Was just about to say something similar.
Most mortgages seem to be “much lower” than Rents in London!
Goerge says
Homeowners spend more on furniture than tenants? Financial security is not guaranteed? Making it easier for first time buyers would cause house prices to rise? Could you come up with more ridiculous arguments?
Just because someone took on a mortgage doesn’t guarantee financial security. You can’t just decide people don’t deserve to buy a house because of that, or no one could buy a house at all.
And the house prices continue to skyrocket. It’s getting harder every day for first time buyers to find a house, but let’s just make it more difficult, shall we? So that eventually no first time buyers can manage to buy a house. The days of ‘bank of mum and dad’ can only go on so long.
Sara (Debt Camel) says
I am not saying that some people don’t “deserve” to buy a house. I am saying the argument that someone can afford to pay the same to a mortgage that they can to rent is way too simplistic.
You think mortgage lenders should give a positive weight to rental repayments. I think it is more difficult. But ignoring our differing views, the fact is that there is no sign that lenders are doing this. So renters keen to buy should be sceptical about the Credit Ladder and other marketing which say it can help. you.
julie ann smith says
So in fact you are saying, its ok to push people in to shared ownership where they own a bit and pay a high rent on the share they dont own, so thats ok, where in fact a mortgage would be considerably cheaper and more affordable ,to help people get on the ladder lets give them higher interest rates, and yet more rent to pay, on top, this issue makes my blood boil, the housing crises is huge, never before have i seen so many people homeless, bring back interest only i say, help people get on the market, i wouldn’t be where i am to day with out proof of income mortgage, it realy helped me, i had good deposit, whats going on now is a disgrace, only the rich can get this, they say they dont want to go back to all that but why ? you didn’t have people stuck in crazy rental, loads have a deposit but cant get mortgages cus self employed , or as such multiply income just is not enough, terrible what is happening, total control by the government, and rich landlords, house builders, never seen such a mess.
Sara (Debt Camel) says
its ok to push people in to shared ownership where they own a bit and pay a high rent on the share they dont own,
I have never said that. I think shared ownership is often very problematic