Should rental payments act as proof of eligibility for a mortgage?
By Hannah Wilde, 20 March 2017
The big news this week in the rental market is the debate around whether rental payments should act as a proof of eligibility for a mortgage.
This subject is at the forefront of public consciousness because of one man’s online petition to get the issue considered for debate in Parliament. Hosted on the official UK Governments and Parliaments’ website dedicated to petitions, this motion comes from 27-year-old renter Jamie Jack Pogson, who by his own admission has paid “over £70,000 in rent on time, yet still struggle to get a mortgage”. The overall aim of the petition is considered in the rental world as a noble one, that “paying rent on time to be recognised as evidence that mortgage repayments can be met”.
If this idea gains enough traction in Parliament, the legislation that would come as a result would help millions of renters who heretofore have struggled to procure a mortgage. However, Mr. Pogson does have his own personal reasons, telling a local Portsmouth newspaper: “It’s such a struggle to pay rent, which is throwing money away when I could be paying a mortgage—which would give me the opportunity to hand down my house to my kids, securing their future”.
Whatever his reasons, Pogson’s petition since going live has gone above and beyond the 100,000 signatures required to consider the issue for Parliamentary debate, increasing nearly 50% to sit at a staggering 144,969 at the time of writing. Further news reporting suggests that every single region in the country has at least one signature, which perhaps is not surprising when considering the fact that homeownership is considerably cheaper than renting—across the nation, homebuyers are a substantial £651 per year financially better off than those who rent.
However, the catch-22 situation is that, in order to purchase your own home to save money on mortgage payments, you would first have to overcome some major hurdles—namely the rising cost of buying a home, and the stringent mortgage lending criteria that all major banks and building societies must adhere to.
As it stands, mortgage rules are set by the Prudential Regulation Authority, a branch of the Government and the Bank of England steadfast in their strict mortgage criteria, judging potential homeowners’ creditworthiness on bank statements, payslips and credit scores. The latter has proved to be the biggest hurdle of all, particularly for first-time buyers—as each lender is different, where you could get rejected by one lender you may well get accepted by another.
This as a system does have its flaws, especially as Mark Homer from Peterborough-based investment firm Progressive Property comments: “Lenders should take more sources into account and be more intelligent about it…they’re too simplistic in their approach”. He then goes on to praise Mr. Pogson’s valiant aim to tackle this with a petition obliging lenders to consider applicants’ past history of rental payments, saying that taking into account rent payments would be a good indicator that someone could afford mortgage payments.
Furthermore, head of personal finance at Together is also in favour of the rental payment masterplan: “There needs to be better access to finance…so that these aspiring homeowners can get a mortgage. The impressive surge in popularity of this petition is clear evidence of the growing frustration among thousands of renters that aspire to own their first home, but are struggling to obtain a mortgage from the mainstream banks”.
Martin Adams, Lettings Manager of Manchester-based estate agency Intus Lettings, was also singing the praises of Mr. Pogson’s petition: “I have long since been of the belief that rent payments should count as part of a person’s credit score, or at least leave some form of footprint on their credit file. This way, rental payments would both count towards future finance agreements including mortgages (which would eventually help tenants onto the property ladder), and would also deter tenants from going into rent arrears, which is a positive for landlords who would see less void periods. All in all, rental payments made available on tenants’ credit file is to the benefit of everyone in the lettings industry—it’s a surprise that nothing has been done about it before now”.
Over the weekend, the Government has responded directly to the petition, making their position very clear that—even if the petition does reach Parliament—it’s unlikely that rental payments will count towards eligibility for a mortgage in the immediate future. Where the survey is hosted on the Government’s website, a lengthy reply signed off by the HM Treasury in the main says that there are many elements that lenders have to consider before applicants are approved for a mortgage, of which rental payments do not have a place.
Below is the Government’s reply in full:
“Lenders must consider a range of factors when assessing a mortgage application. Meeting rental payments is not sufficient in itself to demonstrate affordability over the lifetime of the loan. In April 2014, the independent Financial Conduct Authority (FCA) put in place new regulations for mortgage lending. These were aimed at addressing the problems previously caused by poor quality mortgage lending, such as borrowers falling into payment difficulty and, ultimately, losing their home.
The changes included the principle that mortgages should only be advanced where there is a reasonable expectation that borrowers can repay. All lenders must now conduct an affordability assessment which includes an income and expenditure analysis, and the lender must obtain evidence of that income to support this assessment.
A record of meeting rental payments is not sufficient in itself to demonstrate the affordability of a mortgage over the lifetime of the loan. This is because the affordability assessment must take account of a much wider range of factors. These include:
· the borrower’s income;
· the borrower’s committed expenditure (for example – credit commitments on any secured and unsecured loans and credit cards);
· the borrower’s basic essential household expenditure (for example – utility bills, council tax and building insurance);
· the borrower’s basic quality-of-living costs (for example – clothing, other household goods, personal goods and basic recreation); and
· the ability of the borrower to meet payments in the event interest rates were to rise.
It is important to be aware that home ownership brings a number of additional expenses that may not be incurred when renting, including maintenance costs and buildings insurance. Before extending a loan, lenders must satisfy themselves that a borrower will be able to meet these additional on-going costs when considering a mortgage application.
Many lenders also use information from Credit Reference Agencies (CRAs) when considering mortgage applications. This is because previous customer behaviour, in terms of paying back debts, tends to be a relatively good predictor of future behaviour. Therefore if prospective borrowers have a history of good financial management it can improve their chances of obtaining credit.
Beyond the FCA’s requirements, decisions around the availability of individual mortgage loans remain commercial decisions for lenders, and the Government does not seek to intervene in these.
Whilst one lender may be unable to offer a mortgage, being denied a mortgage from one provider does not preclude a customer from being offered credit elsewhere. There are a wide variety of mortgage products available in the UK and prospective borrowers may benefit from shopping around.”
This means that, gallant as Mr. Pogson’s efforts were to change the fixed mentality of mortgage lenders towards affordability issues for potential first-time buyers, it looks as if things are unlikely to change in the immediate future.
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