The future of affordability assessments

As a result, credit lenders have experienced tightened regulations around credit risk management through more rigorous affordability assessments, as irresponsible lending has significantly contributed to the recent economic downturn. In fact, more credit lenders are seeking specialist support for their affordability assessments than ever before. 

The private rental sector has faced its own challenges, with increasing tenant demand for rental properties and a growing number of buy-to-let landlords exiting the market due to increased mortgage rates and inflation. In the final quarter of 2023, 63% of landlords reported increased demand from tenants.

Tenants and landlords are struggling financially, so accurate affordability assessments have never been so crucial to ensure sustainable rental payments and income.

Although the lettings industry is not regulated by the same authorities as credit lenders, agents still have a responsibility to their clients to ensure the best affordability assessment. In addition to sourcing financially reliable tenants to landlords, agents must also protect prospective tenants from over-indebtedness.

Tenant referencing is a vital part of the pre-let process as before a potential tenant can secure a property, you must understand their true affordability.

You want to find your tenants a home they can comfortably live in and afford while also securing your landlords with reliable tenants and rental income. But with rental fraud on the rise and the financial pressures of individuals impacting whether they can pay their rent on time, there is a critical need for letting agents to understand true affordability. 

Historically, tenancy affordability assessments have focused on analysing an applicant’s previous credit behaviour and penalising those who have been bankrupt or have received CCJs (county court judgment).

While these attributes are relevant to an affordability assessment, it doesn’t consider applicants who have since rectified their debts or their current financial position and commitments.

Such penalties could result in financially reliable applicants missing out on rental properties, and subsequently, landlords missing out on quality tenants.

By utilising an affordability calculation that assesses an applicant’s current outgoings and expenditures as opposed to just an income-to-rent ratio, you ensure a fairer and more accurate assessment.

To qualify suitable tenants, agents must understand their applicant’s full credit commitments, individual attributes and overall indebtedness.

Verifying regular income and cross-referencing an applicant’s income are critical parts of the affordability assessment, as is assessing their overall indebtedness.

It’s essential to ascertain when an applicant’s credit burdens will impact their repayments in the long term. Nevertheless, if an individual is proven to be consistently up-to-date with their repayments, that indicates they have the financial means to honour outstanding debts and sustain them in the future.

While typical tenant referencing processes assess salary, adverse credit history, employment history and references to determine affordability, this does not actually provide the full picture.

On its own, the income-to-rent ratio does not factor outgoings such as loans, credit cards, finance agreements or hire purchases. By taking a deeper forensic dive into the full extent of an applicant’s credit burdens, you can best ascertain the applicant’s financial risks and sustainability. 

In February 2024, HomeLet officially launched our in-house developed tenant referencing solution, VISTA.

Through a strategic partnership with data analytics experts, Experian, we have combined our wealth of expertise to revolutionise tenant referencing with exclusive and extensive access to credit history data that no other UK tenant referencing provider has.

By utilising the same data as banks, credit card companies and mortgage companies, VISTA can assess the full picture of an applicant's outgoings and credit commitments.  

This insight means HomeLet can provide the fairest and most accurate affordability assessment to ensure current and future affordability.

With 70% of VISTA references completed in real-time, HomeLet will deliver a superior turnaround for our references, securing the best tenants in less time.

Find out more about VISTA and the future of tenant referencing here.