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Should a good rent payment record count towards a mortgage application

debt respite breathing space woman

It used to be the case that renting was a temporary phase in a young person's life. It gave flexibility until their career settled down to a fixed employer and a fixed location.

But today's property prices mitigate against this pattern. Many people are locked into renting far longer, some into middle age and some are even resigned to renting for life.

This situation doesn't quite suit a Conservator Government whose stated aim is to create a home-owning democracy. Home owners generally create stable communities, they are less inclined to withdraw their labour, and more importantly for the party, they are more inclined to vote Tory.

How to ease the transition to home owning?

This is the problem facing the Conservatives: landlords are providing most of the housing for young people, which is affordable because a small deposit is needed, whereas a mortgage is much less affordable because of the large deposit requirement.

The maximum mortgage available would be in the region of 95% of the value of the property, and in many cases it would be far less than that. Because rents are high renters find it difficult if not impossible to save sufficient funds to scrape together a decent deposit.

So, without the help of additional funds, most young people are unable to meet the affordability test, the deposit requirements of a mortgage, leaving them with no option other than to continue to rent.

Renting verses paying a mortgage

Whilst in theory if a tenant can afford to pay rent and do so consistently and reliably then that should have a positive impact on any mortgage application. Unfortunately that does not naturally follow.

With house prices at an all-time high, affordability is a problem, but rental prices are even higher in comparison. So one would think that buyers could argue with some justification that if they can afford the high rent, then they can easily afford an equivalent mortgage.

FCA rules

But lenders are bound by the FCA (Financial Conduct Authority) rules which take into account all round income and deposit payments. The rules are there to ensure that mortgage applicants can still afford keep up their mortgage repayments if interest rates are to rise, which is even more likely as of now in an inflationary period.

Owning a house also entails additional costs, unlike renting where the landlord is responsible for all repairs. Repairs, maintenance, buildings and contents insurance are all costs which most renters do not have. A typical mortgage stretches out 25 years into the future, so assessing costs over that period is a different matter than meeting costs of a short term renting period.

It all boils down to the fact that most mortgage lenders won't take into account a person's ability to pay their rent on time, every time, as proof positive that they can afford to meet an equivalent mortgage repayment.

Should rent payments count towards a mortgage application?

People are beginning to question the fairness of the present system. Why should not renters be able to point to a history of reliable payments as proof they can afford a mortgage?

A recommendation made by the think tank Policy Exchange says that counting rent payments towards mortgage applications should be adopted by the government if it really is serious about helping people to get onto the housing ladder.

A briefing paper produced by Gerard Lyons, a senior fellow at the think tank, argues that changes need to come to help 'turn Generation Rent into Generation Buy". It identifies the biggest hurdles for first-time buyers as the deposit and the buyer's annual income assessment.

'The Government needs to seize the initiative in the housing market and shift its policy focus. If it does then there is every reason to expect future success, with more houses being built and with generation rent becoming generation buy as more first-time buyers are able to access the mortgage finance that they need.'�

Saving up for a deposit is especially difficult for those paying out a large portion of their salary in rent each month, says Lyons. He says it should be made compulsory for people with a long history of paying rent on time, perhaps over 'three years'� to be able to use this as evidence to improve their credit score.

No deposit, 100 per cent mortgages

In addition to the repayment assessment, to help young people get onto the housing ladder, 100 per cent loan-to-value mortgages, and in some cases 110 per cent mortgages should be on offer. The idea being that the 110 per cent mortgage would help with renovations when needed.

Currently, the highest loan-to-value mortgages that lenders will tolerate is 95 per cent, which gives them a safety net of 5 per cent should property prices fall back taking them into negative equity.

However, Lyons argues in his paper that there is not much risk in lending the total value of a house:

'Default rates in the UK have been very low, so lenders have rarely actually encountered the credit risk problem. Credit risk may thus be as much of a perceived risk as an actual risk,'� he says.

'Sensibly, ensuring financial market stability has been a key focus since the 2008 global financial crisis. That should remain a key focus.

'In the area of mortgage finance, though, while ensuring that regulatory controls on lending or borrowing do ensure stability, it is important to re-examine these to ensure that they do not unnecessarily curtail innovation. Such measures should be re-examined to ensure that they do not have the unintended consequence of constraining the ability of credit worthy borrowers to access finance, by for instance, placing excessive restraint upon lenders,'� says Lyons.