BLOG: Open Banking WILL help ‘generation rent’ onto housing ladder

Inside every member of ‘generation rent’s bank account are data points that can help them secure a mortgage. Ironically, one of the most important data points is also their biggest expenditure: rental payments.

Traditionally, credit reference agencies (CRAs) have not regarded proof that an applicant pays rent each month as evidence they can be trusted to keep up a mortgage.

Open Banking data and financial analytics is revolutionising how lenders can make decisions and how applicants can demonstrate their affordability.

For renters who want to take their first step on the housing ladder, Open Banking lets them opt to share data with lenders to give real-time details of their spending.

Crucially, it lets them share proof that they pay rent each month and can be trusted to meet financial commitments on time.

Together, Rent Recognition and Open Banking can help to tackle a problem which is becoming more acute during the cost-of-living crisis.

The number of households renting has more than doubled over the last two decades in England and Wales, with the rate of home ownership falling fast.

EYE-WATERING RENT RISES

The average UK tenant spends more than 28% of their pay before tax on rent – the highest proportion in the last 10 years. Average rents for new lets have also risen by an eye-watering 10.4% in a year. To cap it off, private rents rose faster in June 2023 than they have since records began back in January 2016.

The overwhelming majority of tenants want to leave the rental market, with 92% hoping to one day own their own home.

It would clearly be beneficial to use the fiscal responsibility demonstrated in regular, reliable rent payments to ensure their credit score is in good shape when applying for a mortgage.

CRAs do not currently consider rent when making assessments of applicants’ creditworthiness because landlords and housing associations are not typically classed as lenders or creditors.

RENT RECOGNITION TREND

That situation is changing. Earlier this year, the UK surged past 7 million Open Banking users. One of the most compelling use cases is Rent Recognition, which harnesses Open Banking technology to drive financial inclusion by offering everyone an easy way of sharing data that can build up their credit score.

Rent Recognition technology uses application programming interfaces (APIs) to share data securely with CRAs such as Experian. It is now simple to send details of rent payments that will positively contribute to users’ credit scores.

Rent Recognition is part of a much wider trend to provide more holistic and accurate creditworthiness assessments.”

Rent Recognition is part of a much wider trend, with growing numbers of CRAs accessing real-time data through Open Banking to provide more holistic and accurate creditworthiness assessments.

Traditional credit scores exclude a large section of the population who have thin credit files. It’s estimated there are currently around five million people in the UK, including a large number of renters, who are invisible to the incumbent credit scoring system. Credit scores are often out of date or incomplete, so fail to demonstrate true affordability and often paint a picture of someone’s past financial situation, rather than their current one.

CREDIT SCORES

For Britain’s businesses, making lending decisions based solely on traditional credit scores increases risk and restricts their lending by excluding potential clients and limiting revenue. Consumers with thin files face major challenges in simply accessing financial services, forcing them to use more expensive lending options. The ability to demonstrate creditworthiness can improve financial wellbeing whilst minimising the cost of accessing services.

Assessing affordability with Open Banking and supplementing traditional credit scores helps lenders improve their risk management and lend to more people safely.

The financial analytics identifies key indicators of a person’s financial habits that demonstrate affordability (or risk factors) allowing lenders to make more informed decisions whilst reducing financial exclusion because of thin credit files.

LIFE-CHANGING

We see Rent Recognition as a crucial part of the industry’s mission to bring the benefits of Open Banking to as wide an audience as possible. By exploring the feature and incorporating it into their apps, businesses can offer their customers a credit score-boosting ability which can potentially change their lives.

By enabling users to track and report rent payment behaviour, they will help them increase their eligibility for a mortgage. It’s one small piece of data which can have an outsized impact on the lives of people in Generation Rent.

Jon Hart is API Partnerships Director at Moneyhub Enterprise