It sounds like common sense to say that if you have paid £900 rent a month for a couple of years then you can obviously afford a mortgage costing £900 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. A few examples:
- 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;
- most people expect interest rates to go up a couple of times in the next couple of years.
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 aiming to report rents to Experian: Credit Ladder (which is reviewed here), Credit Builder (who in my opinion deserve a wooden spoon for terms 3.3 and 3.4 of their website T&Cs), 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 hyperbole – there is no evidence for this.
Conclusion – not such a good idea at all
Home buyers 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 to rent and to buy, not to fudge the mortgage affordability criteria.