Generation Home commercial director Pete Dockar says including borrowers’ rental payment track record in lending decisions is a “mechanical challenge” that must be addressed.

Last week, the government announced it wants to encourage mortgage lenders to include borrowers’ rental payment track record in lending decisions to allow more first-time buyers (FTBs) onto the property ladder.

Treasury’s financial secretary Andrew Griffith 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.

The three winners, Credit Ladder, Bud and RentalStep were all using technology to verify and record tenants’ rental payments, but it would appear that more work needs to be done for lenders to get comfortable to include these in their affordability assessments.

Docker explains that the challenge is about the stress rates that lenders must underwrite against. 

He says: “Speaking very simplistically, the current mortgage payment is £500 and the rental payment could be £700 therefore, demonstrably affordability is present. But many lenders need to assess at a much higher stress rate, which might be £900, so demonstrating your rent at £700 is great but not relevant.”

“The regulatory requirement is that we need to make sure you can afford the mortgage at £900. There are ways around it by looking at long-term fixed rates but it’s almost a little simplistic to consider the rental payment in isolation and ignore the fact that there is a difference between making rental payments and making mortgage payments in terms of accountability.”

“It’s a good thing to consider, but I think it’s more for the margins than the centrepiece for how you fix affordability for FTBs.”

Meanwhile, CHL Mortgages commercial director Ross Turrell says a lot of the reason why there hasn’t been a large take-up from lenders is because of having to comply with regulations as well as requirements from the Financial Conduct Authority (FCA). 

However, Turrell comments: “If someone can prove over an extended period that they are paying rent, and you can easily prove that via their bank statements because they pay monthly. If someone has two years track record of paying rent that’s more than what their mortgage would cost from an underwriting point of view, why wouldn’t you lend to them and from an affordability risk aspect.”

“It takes me back to something that might have been around a while but back in the day when building societies when you had very limited funding in the 1970s and early 1980s, you used to have a track record of people who used to save. For example, show me that you can save on a regular basis and then we’ll give you a mortgage.”

“I’m a big advocate of looking at people’s track record to see if they can afford the payments,” he adds. 

However, Knowledge Bank chief executive Nicola Firth questions the challenge of the fact that it’s really easy to come out of a tenancy agreement compared to a mortgage agreement and the additional costs of homeownership maintenance repairs.

Turrell says: “I would argue that it isn’t easy to come out of a tenancy agreement. If you come out of a tenancy agreement, you’ve then got to find the next deposit and find where you’re going to move to.”

“I remember a few years back when there were big hikes in rent increases. It was an absolute nightmare for the individual tenants to try and keep pace with the increasing rent that has been required at the drop of a hat from a landlord and the cost of having to move was excessive. So I don’t buy that, I think there are costs involved in both aspects of tenure.”

Speaking from a broker’s perspective, Charles Derby Mortgage Bureau sales director Tony Nunn says: “You still have the confines of affordability, loan to income (LTI) and everything else that goes with a mortgage application.”

Nunn comments: “Where this might be good is if it was included in credit scoring because when we’re talking about kickstart in the market, we’re talking about getting score up, and about people being able to qualify for a mortgage.”

“For FTBs who have been renting or living at home, if they could do anything to bolster their credit score and give them a wider marketplace rather than a credit check then I think it’s a good thing.”

“I don’t see how you could possibly lend against the rent track record because it far exceeds their LTI then what difference does it make? They are affording it, but they’re having to afford it or they are on the streets. I think the same applied with a mortgage, but I think it’s a bit of a red herring,” he adds.