Buy Now, Pay Later: what home buyers need to know
Buy Now Pay Later (BNPL) services - such as AfterPay, Zip Pay, Klarna and others - allow consumers to purchase items immediately and pay for them over a series of instalments. If payments are made on time, this service typically doesn’t attract interest, with the providers making their profit from account fees. Whilst these services can be a convenient alternative to a credit card their use will impact your ability to secure a mortgage.
Here are some things to keep in mind:
How do BNPL facilities impact borrowing capacity?
Repayments count as expenses: lenders treat BNPL repayments as part of your regular living expenses. Even small instalments will reduce the amount that you can borrow as they lower your disposable income.
Multiple accounts can raise red flags: having several BNPL accounts or using these facilities frequently can be an indicator that you are overcommitted or not managing your finances effectively, which may impact your borrowing capacity.
BNPL is assessed the same way as a credit card: so many of my clients have a $3000 facility that they rarely use, however just like a credit card the bank will assess this as though you could use the whole limit at any time. They will then factor the repayments on this amount into your living expenses, which will reduce the income that you have available to service a mortgage.
Credit Assessment and Risk
Regular or substantial BNPL usage can be interpreted as financial stress or poor money management when assessing a home loan application.
Credit Score: some BNPL providers report to credit bureaus which means that multiple applications or missed repayments will have a negative impact on your credit score. This in turn can impact your ability to secure a home loan.
Debt to Income Ratio (DTI): a key metric lenders use to assess how much you can safely borrow, BNPL adds to the ‘debt’ part of this equation. If the ratio is too far in favour of debt this will impact on how much you can borrow.
Tips for Mortgage Applicants using BNPL
Disclose all BNPL applications to your broker upfront - even if you don’t use them. Not doing so will only mean that you need to re-work all of your numbers when the broker or the lender reviews your bank statements/credit report.
Limit or close accounts: where possible try to pay off and close BNPL facilities. If using in place of a credit card, determine how much you really need and stick to the minimum.
Avoid missed payments: as with any type of credit it is crucial that payments be made on time. If an applicant is missing repayments on a $2,000 debt, why would a bank be confident lending them $500,000?!
Monitor spending habits: are BNPL facilities being used to manage cashflow or to fund non-essential purchases that could probably wait? This is a very personal decision and each person will have their own priorities.
In summary, while BNPL services can be a convenient alternative to a credit card their use can have a substantial impact on your mortgage application and borrowing power. Responsible management of credit and full transparency are crucial if you are planning on applying for a home loan.
If you find yourself in financial difficulty, this article from the government Money Smart website offers some advice and free resources. The sooner you reach out for help, the sooner you can get back on track :)
https://moneysmart.gov.au/other-ways-to-borrow/buy-now-pay-later-services