Home lenders in the UK should recognise rental payments when making lending decisions, as new research unveils that rental rates are rising rapidly when typical monthly mortgage payments for first time buyers are falling.
In the UK private tenants paid more for their accommodation in 57% of districts during the third quarter of this year, compared to the same period in 2015, according to the first time buyer index from Experian.
At the same time, the monthly mortgage payments a first time buyer could expect to pay has dropped in 65% of districts, assuming their loan was for 90% of the property on a two year fixed rate mortgage over 25 years.
The amount renters pay for their accommodation is either above or within 10% of the monthly payments they could expect to pay for a mortgage in 27% of UK districts and the research says this suggests that, if they could raise a deposit, many of the UK’s 4.3 million private renters would find monthly mortgage payments to be manageable and in line with their current rental commitments.
Scotland is home to six of the 10 districts where rental rates exceed monthly mortgage payments by the greatest margin. Manchester, Salford and Hull in the North of England also offer among the most favourable conditions for renters to become first time buyers.
‘What our research shows is that while a mortgage is a major ongoing commitment, renters often have a track record of making monthly payments which are often similar to what they might pay on a mortgage,’ said Experian’s Jonathan Westley.
He explained that lenders already apply rigorous checks to assess whether mortgage payments will be affordable for would be home owners, following the Mortgage Market Review but by taking rental payments into account, lenders can get a more complete picture of a borrower’s financial track record and make more suitable lending decisions.
The research also found that in 36% of districts the cost of renting had increased in the third quarter year on year, while mortgage payments had fallen. The reverse was true in only 4% of places, suggesting the balance across the country is shifting towards mortgage payments becoming more affordable compared to those who are currently renting.
‘Lenders take more into account than simply the amount you have raised for a deposit and what multiple of your earnings you are looking to borrow. The responsibility of ensuring mortgage payments are affordable for borrowers in the long term is one lenders take seriously,’ Westley pointed out.
‘They want to get a complete picture of a would be home owner’s financial commitments and see a strong track record of making regular payments. This helps lenders to understand how a borrower would manage mortgage payments now and in the future,’ he added.
Experian has developed the Rental Exchange to help renters get a mortgage. It allows rental payment information to be submitted to Experian, which will help strengthen renters’ credit histories and ease their difficulties when they buy a home.
