Renters can be at a considerable deficit when it comes to the acknowledgement of regular monthly payments reflected within their credit profile.
This impacts millions of people, excluding them from improving their financial wellbeing and borrowing. Part of eliminating this inequity is rent recognition, powered by Open Banking technology.
Since financial institutions make lending decisions based on credit history, many in the renting category fall into the category of having “thin” credit files, impacting over 5 million people in the UK. Their credit profile does not reflect their consistency and reliability in rental payments, failing to reflect their full financial picture and demonstrating their eligibility for reliable repayment.
Renting households are growing while homeownership declines
In the last two decades, the number of renting households has doubled in England and Wales. The total number in the renting segment totals 5 million households. With this increase comes the opposite effect for homeownership, which dropped from 64.3% in 2011 to 62.5% in 2021.
There are several reasons for these dramatic changes. Housebuilding rates are well below the targets set by the government. As property investors continue to enter the market, access remains limited.
Renters spend over a quarter of their income on rent
With the rental market in high demand, rates are higher, growing by 10.4% in just a year. A UK tenant spends more than 28% of their pre-tax income on rent. This fiscal burden makes it difficult for renters to save money towards buying a home, none of which supports their credit score.
It’s a complex challenge, but there is a movement towards rent recognition as a means to break down obstacles for transitioning from renter to homeowner.
Making lending decisions solely on traditional credit scores increases risk
Lending institutions that base decisions only on traditional credit history face more risk. This narrow view also reduces the pool of candidates to become customers and the potential revenue generated.
The path toward rent recognition is through Open Banking
Rent recognition has the potential to reverse this financial discrimination and be a data point to support someone’s creditworthiness. The key to facilitating this is with Open Banking. Open Banking is the process where consumers agree to share their banking data and transactions with third parties. It enables fast, secure transactions and democratises finance. It has a stable, regulated framework with significant growth. Early this year, the UK reached 7 million Open Banking users.
Rent recognition via Open Banking is beneficial for lenders and consumers. Lenders receive a more complete and accurate view of a person’s fiscal posture. It can also reduce your lending risk with this more informed view. Renters can use it to qualify for a mortgage and improve their financial well-being.
How does rent recognition via Open Banking work?
Open Banking’s foundation is the secure and consensual sharing of transactions and banking data from consumers to third parties, including rent payments. Moneyhub APIs identify and verify rent payments, then sending them on to the credit rating agency (alternatively, companies can send this on themselves).
Determining creditworthiness with rent recognition benefits all stakeholders
There’s mutual benefit of implementing rent recognition for both companies and customers. Confident lending decisions can be made, supporting customers out of the rental market and into home ownership.
Learn more about rent recognition through Open Banking with Moneyhub.