Leeds Building Society has teamed up with Experian to incorporate regular direct debit payments into credit scores for first-time buyers.

Leeds Building Society is taking a new approach to credit scoring to help more first-time buyers get a mortgage and buy a home.

The building society has joined forces with credit reference agency Experian. They’ll allow first-time buyers applying for a mortgage to prove their financial track record with a wider range of payments.

Traditionally, credit scores only incorporate repayments for debt, such as credit cards, mortgages or loans.

But Leeds will now consider other regular direct debits during the past 12 months. They’ll include payments for council tax, subscriptions and even Netflix or Spotify.

Richard Fearon, chief executive at Leeds Building Society, said: “We’re proud to be the first mortgage lender in the UK to make it easier for aspiring homeowners by incorporating free ‘boosted’ credit scores.”

Leeds offers mortgages that require only a 5% deposit, with rates starting at 4.94% for a five-year fixed rate deal with a £999 product fee.

How does the new credit scoring work for first-time buyer mortgages?

Leeds Building Society will incorporate information from Experian’s free Experian Boost service. This will show you have kept up with regular payments.

The service uses Open Banking to look at payments made through your current account.

The Open Banking initiative allows you to share your banking data with third parties that are regulated by the Financial Conduct Authority through secure connections. The data cannot be shared without your explicit consent.

While Experian Boost is free for consumers to use, Leeds is the first mortgage lender to use it for lending decisions.

How many first-time buyers will be helped by this credit-scoring approach for mortgages?

Testing for the new approach found that 7.5% of applicants improved their credit score through using Experian Boost.

For some first-time buyers, this could be the difference between qualifying for a mortgage and not qualifying for one.

Leeds believes Experian Boost is particularly helpful for younger borrowers, first-time buyers, and those on lower incomes, who typically face the toughest challenges in proving they are credit-worthy.

Fearton said: “Often through no fault of their own, these groups can struggle to build a good credit score because they need to spend most of their earnings on rent and other regular payments. Indeed, the vast majority of existing Boost users are renters.”

How is your credit score worked out?

Credit reference agencies like Experian collect information about you from registers, lenders and other service providers.

Lots of factors impact your credit score, including credit applications, the amount you’ve borrowed and missed or late payments.

What is a good credit score?

Most credit agencies in the UK use a points system to determine your credit score.

This usually ranges from 0 – which is the lowest possible credit score – to 999 or 1000, which is the best credit score.

With Experian for example, a good credit score is anything above 721, while scores above 961 are deemed ‘excellent’.

What credit score do you need for a mortgage?

In general, the higher your credit score, the better your chances of getting a mortgage.

Lenders will take your score into account to decide how risky it is to lend to you.

So if you’ve shown you can pay all your bills on time, they deem you safer to lend to. This can mean they offer you a lower interest rate.

However, lenders also look at other things like affordability, income and account history to decide if you’re eligible for a mortgage.

In some cases, you can still get a mortgage if you have a bad credit score.

Each mortgage lender considers different scores to be ‘bad’. How much you owe and whether you’ve repaid debts can also make a difference.

What other initiatives can help first-time buyers get on the property ladder?

The Leeds Building Society initiative comes as Skipton Building Society has launched the first 100% mortgage to be offered since 2008.

The mortgage enables first-time buyers to purchase a property without a deposit and without a guarantor.

Instead, borrowers must provide evidence they have paid their rent on time for the past 12 months, as well as meeting the lender’s credit score and affordability criteria.

Another innovative scheme that was launched earlier this year to help first-time buyers is the Save to Buy initiative.

Offered by housebuilder Fairview New Homes, Save to Buy enables first-time buyers to move into their home and pay ‘rent’ at a fixed cost for between six months and two years. The money is set aside until it is enough to use as a deposit to qualify for a mortgage.

Key takeaways

  • Leeds Build Society will enable first-time buyers to use a wider range of payments as proof of their financial record when they apply for a mortgage
  • It will include regular direct debits made during the past 12 months, including payments for council tax, subscriptions and even Netflix or Spotify
  • Testing found the new approach improved the credit score for 7.5% of mortgage applicants