Mortgage affordability and rental payments

Journalist: Anna Sagar, Mortgage Solutions / Specialist Lending Solutions

ended 05. July 2022

Looking to speak to mortgage brokers about including rental payments into mortgage affordability. 

  1. What are the barriers to this/why hasn't it been included previously? 
  2. Do you think this would help more clients get on the property ladder?
  3. Do you think that lenders may look to include this in the future or not? 

6 responses from the Newspage community

Star Quote
The main reason for not allowing proof of historic rent payments to demonstrate mortgage affordability is to avoid customers being overcommitted. When someone is renting, the property insurance and maintenance are the responsibility of the landlord. Just because someone could afford the rent doesn't mean they will be able to cover the upkeep of the property. Personally, I don't see this getting the traction that many hope for. Banks and building societies have been burned once before with self-certification and have spent a lot of time building a robust affordability model to minimise the risk of a future financial crisis.
That someone can manage to pay sky-high rent does not qualify them for a mortgage. I know that statement seems controversial, but it isn't. We've seen before what happens if you let people determine what they can afford by way of self-cert mortgages. Look how that turned out. For starters, there must be a mechanism to determine what someone can afford to borrow. It must be fair and applicable across the board, and lenders must follow the rules. The big issue is this: people say they can afford the rent and therefore can afford the mortgage, but what happens if rates rise? What happens if the boiler blows up and all their disposable income is paying off a mortgage? We've seen lenders accused of irresponsible lending in 2008 when it all came crashing down. Yet all those that had previously said they could afford the mortgages through the self-cert route all of a sudden blamed the banks for loaning them what they asked for. If you want someone to blame I'd suggest talking to perhaps the previous generation that wanted to pass the buck when it all went wrong However, the biggest hurdle is this - it's a tricky, costly and involved legal process to repossess a property. People need to stop blaming lenders for the current situation. The issue lies at the feet of the government for not having a credible housing strategy to build affordable homes and because we have an economy that's only function is to funnel wealth to the top. We should stop looking for quick fixes because there aren't any. We need more homes to be built, and the workers of the country need an above-inflation pay rise, and that's just for starters.
Proving that you have a track record of paying rent won't have any impact on mortgage affordability, just as a history of proving you have paid any current mortgage of loans on time won't, these are however factors that impact lenders credit score cards (theoretically a better credit score could lead to a slightly higher mortgage level being agreed than a lower one). This is where the problems start, as credit scores are system-generated from data input and then cross checked against the credit file. So, unless rental payments are going to be added to the credit files across the board by all landlords, there is no automatic way to check them, meaning they then can't be factored into credit scores by lenders.
It makes sense for it to be included, afterall it is still a commitment, if you cannot keep up your rental payments how are you ever going to keep up with mortgage repayments. Many credit reference agencies are not including this in their reports, i can only see it being a positive step in helping those get a mortgage.
There is great logic behind this and I think there could be a place for it to be used on assessment. My only hesitation is that it could be open to abuse if used as a sole method of measuring affordability, so I think it should be used as a way of supporting affordability rather than justifying it.
Before the credit crunch and the mortgage market review (which aimed to put in place safeguard against a credit crunch ever happening again) there were a handful of lenders that would allow you to based your mortgage lending on your rent if you could demonstrate that you have paid that rental at that level for 12 months. Affordability assessments that were brought in prevent future credit crunches put a stop to this and I would argue for good reason. The current assessments factor in a "stress test" which takes into account things like the cost of running a property and interest rate rises. If you are able to afford your rent but not any essential repairs on the property then you could end up living in housing that isn't at an acceptable standard but without the means to correct that you could end up without heating or living in a damp riddled property. In addition we need to consider a joint property, if you own your property you have a responsibility to make sure that they can continue to live there even if you are unable to work or die so I would argue that you have to consider the cost of life insurance and income protection into the overall affordability. The key problem isn't just the lenders affordability checks, it's that we need more housing and more real affordable housing to be built in order to allow people on the property ladder.