Why don’t first-time buyers get credit with mortgage lenders after years of paying rent on time and in full?
Renters pay billions of pounds every month up front. It hasn't made any difference to their home-owning futures. Until now
A lot has changed since the credit crunch. For most of us, those changes revolve around mortgages and the fiendish difficulty in getting one.
Many of those already on the property ladder when lending criteria were tightened in a bid to ensure borrowers could genuinely afford their borrowing are now stuck on expensive standard variable rates (SVRs) because the goalposts have shifted.
Meanwhile, would-be first time buyers, often forking out more in rent than they would pay on a mortgage, regularly struggle to prove their affordability and reliability credentials to mortgage lenders whose interpretation of the affordability guidelines can vary dramatically.
Those who do secure credit can end up pay more for it simply because they’re renting.
Until now, years of responsibly paying their rent up front and in full hasn’t been taken into account, but home-owning hopefuls may be on the verge of a breakthrough.
This week, spurred on by a 147,000 signature strong petition and years of industry debate, Parliament finally got around to discussing the possibility of including such a track record as part of the mountain of information that goes into a credit score. It’s the financial profile that lenders rely on to determine the credit worthiness of a potential borrower.
Give them a chance
“I’m surprised no one has really pushed this before,” said Paul Scully MP, who sponsored the bill.
“The Big Issue already works with Experian on something similar but it is limited to social landlords supplying rental information, mostly to help low income households with things like bank accounts.”
Indeed, businesses are already working behind the scenes assuming the inclusion of extra details. Equifax, for example, has confirmed it was in the process of “loading new payment data” that will be included in credit scores.
“Equifax fully recognises the importance of a wider scope of payment information, like rental data, as it enables individuals to be able to reflect good payment behaviour across all areas,” the business said in a statement.
“In turn this will help credit lending communities to make more informed decisions and produce better outcomes for their customers.”
However, concerns were raised as part of the parliamentary debate over the level of influence landlords could have over renters’ lives as a result of such a change because the onus would be on them to provide the information.
And although almost two thirds of landlords support the proposal according to the Residential Landlords Association (RLA), any change would add to landlords’ workloads – most of whom only have one or two rental properties – at a time when they have recently been handed additional responsibilities by government including checking the residency status of those they rent to.
Above all, while the move would be designed to help renters by offering a more rounded view of their credit profile, the odds will be further stacked against those who haven’t met all their rent payments in the past.
Campaigners will now wait to see what, if any action will be announced in the Autumn Budget on 22nd November.
“The man who started this petition may have actually changed the system,” Scully added, describing the actions of Jamie Pogson, a 27 year old father of two, from Plymouth who states he has promptly paid £70,000 worth of rental payments but was struggling to be accepted for a mortgage.
That’s not all
But even with such a change, first time buyers are facing other paperwork challenges.
The attention on crisis level debt among consumers, particularly young adults is driving many Millennials in particular away from having any credit agreements at all.
Perversely, steering clear of credit and living within their means as urged can have a negative effect when they come to apply for a mortgage.
Without enough information to go on, lenders are even more likely to turn down an application than if there was a full but average-to-poor credit history available.
“We've seen an increase in millennial credit aversion over the last five years, which is impacting both their credit scores and chances of getting a mortgage in the future,” says Jacqueline Dewey, Managing Director of Noddle, Callcredit’s credit report service.
“While this legislation is being discussed, there are other simple ways young people can start building that all-important credit history.”
These include ensuring payments are made on time for all bills, including innocuous ones like mobile phone charges. Getting on the electoral roll is another important and straightforward step, as is ensuring contracts and small scale financial agreements, such as that phone, are in your name in order to start building up a robust credit profile.
Applicants should also ensure they don’t apply for too many credit products or for large amounts of money in a bid to keep a lid on their spending and to avoid having a negative effect on their credit score.
With care, having a credit card can also help. Used regularly but, crucially, with the balance paid off in full every month to avoid high charges, such an account can make a significant difference.
Credit builder cards are specifically designed for this purpose.