Rising rents and falling mortgage payments

Jonathan Westley

November 14, 2016

Jonathan Westley is managing director of Experian

“When my information changes, I alter my conclusions,” is a quote attributed to economist John Maynard Keynes. It seems an eminently sensible position – examine the evidence available to you at any given point to arrive at a decision.

Few financial industries have gone through as much change as mortgage lending in the last decade. The emphasis on affordability demanded by the Mortgage Market Review has been taken on board by lenders, who look far beyond a deposit and a multiple of earnings to make a lending decision. Decisions are made on the basis of how a borrower can expect to service monthly payments in the long-term.

Research conducted by Experian looked across the UK at the relationship between rental rates and the typical monthly mortgage payments a first-time buyer could be expected to make (we used the average rate on a 2-year fixed rate mortgage, assuming a 90% loan-to-value over 25 years).

Rental payments were either below or within 10% of the monthly payments someone could expect to pay on a mortgage in 27% of districts. Given there are 4.3 million private tenants in the country, it seems many would find monthly mortgage payments to be manageable and comparable to what they currently pay to rent, assuming they could get a deposit together.

Interesting but then perhaps not surprising against a backdrop of increased demand for rental properties and the low interest rates we currently see lenders offering. But using Keynes for inspiration, what should this changing information mean for the conclusions lenders arrive at?

It stands to reason that a would-be first-time buyer who has been making rental payments reliably for a number of years could be a strong candidate to behave in the same way if presented with mortgage requirements at the same level.

Our research found that in more than a third of districts the cost of renting increased while the typical monthly cost of a mortgage fell year-on-year. The reverse was true in just 4% of districts. It’s still cheaper on a monthly basis to rent than buy in most districts, but the gap is narrowing.

There are other factors which could change lenders’ thinking: Will interest rates remain low in the medium-term and reflect kindly on homeowners? Will a surge of housebuilding to offer supply to meet the considerable demand for homes bring more affordable options to the market? Could creative homeownership solutions help first-time buyers to build enough of a deposit to get onto the ladder?

All these questions are key to the affordability decisions lenders must make. All they can do is to take all of the information available today to make responsible lending decisions in the long-term. By considering an applicant’s track record of rental payments, lenders can get a 360 view of a borrower’s financial situation to draw the most accurate conclusions on how they will handle monthly mortgage payments.

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