Mortgages: Eligibility — [Mr Philip Hollobone in the Chair]

Part of the debate – in Westminster Hall at 4:30 pm on 23rd October 2017.

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Photo of Paul Scully Paul Scully Chair, International Development Sub-Committee on the Work of the Independent Commission for Aid Impact, Chair, International Development Sub-Committee on the Work of the Independent Commission for Aid Impact 4:30 pm, 23rd October 2017

My hon. Friend is right that choice is important. I still believe that a simpler tax system would enable the system’s anomalies to be ironed out right at the beginning, rather than each Budget having to iron out any anomalies that come out over time, but I welcome his intervention.

I began by talking about supply, which is the most important thing, in my view. The Government have taken action on that issue. Last year saw the highest number of residential planning permissions being granted on record and the highest level of net housing additions since the recession. However, the average home still costs almost eight times people’s average earnings, making it difficult to get on the housing ladder. The proportion of people living in the private rented sector has doubled since 2000, with more than 2 million working households with below-average incomes spending a third or more of their disposable income on housing. That is why I am encouraged by the vision for housing set out in the White Paper. The starting point must be to build more homes, slowing the rise in housing costs, so it is right that the White Paper sets out measures to plan for the right homes in the right places, to build homes faster and to diversify the housing market.

Even if we can get enough houses, lower fixed costs for homebuyers and provide short-term help through schemes such as Help to Buy, there is still a significant structural issue that many young people, in particular, will face, and that is the difficulty in getting a mortgage. Tenants can be disadvantaged in getting credit beyond mortgages. Millions of people are excluded from affordable credit because they do not have a credit history. For the financially excluded, it is a Catch-22 situation: without a credit score, applicants are declined by mainstream providers and considered riskier customers, but the only way to build a credit score is to have a form of credit, such as a mortgage or credit card, in the first place.

Most people on low incomes manage their limited money carefully, yet banks, utility companies and other retailers can discriminate against them. An estimated 2 million people, many of whom are social housing tenants, take out high-cost loans because they cannot access more affordable credit. The Financial Inclusion Commission estimates what is often called the poverty premium—the extra spent on basic necessities such as gas and electricity, mobile phones, white goods and furniture—to be £1,300.

Big Issue Invest has an interesting initiative called the Rental Exchange that will chime with people who supported the petition. The organisation is working with Experian, the UK’s leading credit reference agency, to prevent low-income people from being caught in a vicious circle of no credit score and no lending. Since 2010, Big Issue Invest and Experian have been working with registered social housing providers to incorporate tenants’ rent payment history into their credit files, with no cost to either the housing provider or the tenant. The data are kept in a secure and compliant way, are not used for marketing purposes and are made available only if the tenancy information is relevant and the tenant has agreed to a credit check, or if it is strictly necessary for an organisation to check information about a tenancy, such as in a case of fraud. Tenants can opt out of the scheme.

More than 150 registered housing providers, including housing associations, local authorities and arm’s length management organisations, are signed up to the Rental Exchange, representing 1.5 million tenants across the UK. Experian has tested the value of adding rent data to tenants’ files for each housing provider that comes on board, working with the provider to ensure that rent payment data are accurate before allowing them to go live. The testing has demonstrated some positive results, including an increase in digital identity authentication rates from 39% to 84% for social tenants when rent data are included in credit files. As well as allowing better deals while shopping, that makes life easier in other matters, such as signing up at a GP surgery or accessing benefits without paper copies of identification. In more than 70% of cases, tenants with no significant arrears have increased their credit score.

As well as tackling financial exclusion among the people on the lowest incomes, the approach can have a significant benefit for young people who might have a reasonable income but have not had the time to build a reasonable history for lenders to consider. Rental data add more weight to a credit file on the register, giving lenders more confidence that the applicant is genuine, and a positive payment history provides a strong indicator of good financial conduct. Lord Bird, founder of The Big Issue, has introduced a private Member’s Bill in the other place, the Creditworthiness Assessment Bill, which considers the wider implications and difficulties of financial exclusion, but I will limit the rest of my remarks to access to mortgages, as per the wording of the petition.

First-time buyers are much more likely to have been living in rented accommodation now than 20 years ago—66%, compared with 39%. Rent in London may have fallen over the last few months, but with a Greater London average rent of £1,564, the total amount spent on housing is still a huge proportion of the average household income, so it is hardly a surprise that so many people saw the suggestion in the petition as worthy of further consideration. I am pleased that the Residential Landlords Association supports the petition, although it expressed some concerns about the Rental Exchange system, as smaller landlords must go through another layer of bureaucracy in order to be included: their rents must first be paid to a “credit ladder” before being passed on to them. The RLA expressed concern that that muddies the water about who chases rent arrears and distances landlords further from tenants.

Although those issues can be overcome, the concerns point to the fact that even a seemingly simple move would need to be carefully considered so as not to create any negative unintended consequences. Clearly, the last thing that anyone would want is for lending to be relaxed to the point that triggered the mortgage market review in the first place. Back in 2010, the Financial Services Authority found that expectations of ever-increasing house prices and the ability to pass on risk to others led to relaxed lending criteria and increased risk-taking.

There is nothing in the petition to suggest greater risk taking; in fact, the opposite is the case. Having a more rounded financial history for applicants can lead to more informed decision-making by lenders. That transparency works both ways, and could have a negative impact on future applications for some. There are many other factors that lenders must consider, such as long-term income stability. Homeowners have other costs that renters do not have to pay, such as redecoration, insurance and so on. Maintaining a home is not cheap, especially when it comes to one-off but necessary maintenance such as roof repairs. House purchasing is a long-term commitment, and interest rates can rise more erratically than rents.

The Petitions Committee arranged a forum on the Money Saving Expert website, which 1,400 people viewed and a few people commented on. One person expressed concern that letting agents have too much power over tenants as it is, but the majority of commenters were largely supportive of an approach like the one mentioned in the petition. Some people wondered why Government needed to be involved in the first place, a sentiment with which I have always had sympathy. I am old enough to remember Ronald Reagan’s nine most feared words:

“I’m from the Government, and I’m here to help.”

The Budget is coming up. I make a belated plea to the Minister to take the feedback from the 147,000 people who have signed the petition and consider moving towards a solution in the forthcoming Budget. When he replies, can he let us know whether he thinks that there is a market-based solution that we can unlock with our world-leading fintech businesses? Petition Committee members always say that an e-petition debate is not the end of the petition process but the start of a campaign. Including rent payments in the assessment of mortgages is not without its possible negatives, but I believe that it is well worth considering. I suspect that a market-based solution will have the flexibility required to make it work; brief legislation cannot easily change as the market develops. I hope that the Minister and the Government will consider the petition seriously and do what they can.

I remember the joy of buying my first house, and the sense of freedom and achievement. I am now at an age when my children, the eldest older than I was when I first picked up those house keys, are looking at the options open to them with some concern and trepidation. Let us ensure that first-time buyers have every chance of getting on the housing ladder, fulfilling the aspiration that so many of us have had the good fortune to realise. Let us do what we can in this area as another piece of the jigsaw in supporting a new generation of homeowners.