"Rental payments are usually an individual’s largest monthly outgoings and are therefore a significant indicator of one’s creditworthiness."
The Bill states that all firms carrying on credit-related regulated activities, including mortgage lending and providing credit scores, should be required to “take into account rental payment history and council tax payment history when assessing a borrower’s creditworthiness”.
MPs from across political parties have been working with companies such as Experian to explore ways in which people’s rent can be used to improve their credit rating.
Members of the House of Lords agreed it was unfair that those who pay a mortgage on time "automatically have a higher credit rating".
A petition started earlier this year on the topic received over 100,000 signatures, meaning that it was considered for debate in Parliament. MPs from different parties, including economic secretary to the Treasury Stephen Barclay, have agreed that a good rental payment record should help borrowers to secure a mortgage.
The Minister of State, Department for International Development, Lord Bates, said the Bill would address the issue of rental tenants having restrictions placed on them in the availability of credit.
Bates said: "Currently, a history of meeting rent payments is not routinely recognised in people’s credit scores and is not commonly taken into account when banks conduct mortgage affordability assessments. For those without a long history of borrowing on a credit card, this raises the cost of borrowing.
"This leads to a state of affairs where the poorest pay the most. This problem is commonly described as the “poverty premium”. It also creates a significant barrier to getting on to the housing ladder because it raises the costs of getting a mortgage.
"I recognise that banks must take into account other factors when assessing mortgage applications, including the multiple additional costs that come with home ownership. None the less, rental payments are usually an individual’s largest monthly outgoings and are therefore a significant indicator of one’s creditworthiness. For this reason it is right that a history of successfully paying rent should be recorded and recognised."
However Bates believes the solution to the issue should avoid imposing further regulatory requirements on lenders, landlords or credit reference agencies, stating that this could "generate a significant burden for these businesses".
He said given that mortgage lenders currently lack easy access to rent payment data, the approach currently "represents a significant logistical and technological challenge".
In last week's Budget, the Government announced the rent recognition challenge, a £2 million competition challenging technological firms to develop new applications to enable rental tenants to record and collect their own rental payment data and share it with lenders in mortgage affordability assessments and credit scores.
The Creditworthiness Assessment Bill will now move on to the Committee stage for further scrutiny, usually starting about two weeks after the second reading debate.
