Are you a frequent user of buy now pay later apps? A lot of us for sure had a blast shopping for gifts and discounted items during the holidays using accounts from companies like Afterpay, Zip, Openpay, etc.
However, first home buyers must be aware about the potentially damaging effects of certain ‘Buy Now Pay Later’ (BNPL) schemes on their home loan applications. They might prove to be helpful on the short-term, but it has long-lasting implications on your credit score. It might also complicate your first home buying purchase.
In this blog post, we explore why it makes sense to be mindful about using BNPL payment options when you’re looking at securing a home loan, giving you the insight you need so that one financial mistake doesn’t stand in your way of your home loan application.
What is BNPL?
First, what does BNPL mean? It stands for “buy now, pay later” and is a type of payment plan available in Australia. It allows customers to purchase items or pay bills without paying the full amount upfront.
Instead, customers pay the cost over instalments, usually spread out over several weeks or months.
BNPL companies like Afterpay Australia do not have the same legal protections as other credit products. They are not covered by the National Consumer Credit Code — which means they are not legally obliged to check your borrowing capacity nor to account for your financial troubles.
It’s also worth noting that the fees can add up quickly, especially if you made multiple payments on different days or used multiple shop now pay later accounts. Late payments usually translate to late payment fees, collection fees, dishonour fees, and so on.
Why is BNPL so popular?
This type of payment plan is becoming increasingly popular in Australia due to its convenience, flexibility and affordability. This popularity is heightened by the fact that a long list of BNPL companies are moving into essential services like paying rent or childcare bills.
BNPL schemes are so popular that there are one out of five people who use BNPL to pay for essential goods and services. This is according to research done by CHOICE, a consumer advocacy group.
Things you can do with Buy Now Pay Later Australia schemes
With BNPL accounts, you can:
- Shop now pay later if you don’t have a credit card, or don’t want to get a huge balance on your credit card and deal with credit card interest
- Buy an item that sells fast, or available only on seasonal sales
- Pay bills with Afterpay or similar apps like ZipPay, Humm, Bundll, Openpay, and Klarna
- Make necessary purchases like furniture or appliances without paying a huge sum upfront
How do Buy Now Pay Later accounts affect your home loan application?
Opening a BNPL account per se does not automatically merit a black mark on your credit file. However, some first time home buyers who are owners of BNPL accounts are asked to close them and send proof of account closure to obtain the loan.
This is because lenders usually consider BNPL accounts as credit. Major banks like Commbank, Bankwest, Westpac, and ANZ look at a range of commitments when assessing a customer’s capacity to service a loan. These include BNPL transactions where applicable.
When you miss BNPL payments, your credit rating suffers.
Almost 4 in 5 people who miss BPNL payments experience some form of financial difficulty as a result. One such difficulty is being able to take out a loan.
That is because of their credit scores that got impacted by BPNL schemes. Lenders use your credit history to assess the level of risk you pose as a potential borrower.
Missed BPNL payments and even defaults not only reflect on your credit history, but also are likely to reduce eyour credit score. When banks see this, they base their evaluation of you off these credit reports.
Multiple BNPL applications and accounts also impact your credit report.
BNPL lenders check your credit report when you sign up for a BNPL account. These checks reflect as a credit inquiry on your credit report (with the exeptions of soft credit enquiries). Transactions using your BNPL accounts that are linked to your credit card are also readily avaiallble on your credit report.
However, they do not build credit.
Buy Now Pay Later affect home loan approval — negatively.
BNPL accounts impact your home loan approval when:
- Making minimum payments leads you into further debt than what was initially taken out with the original purchase
- Compounding interest or penalty fees can cause the total amount owed to increase quickly and leave you unable repay your loans
- Your credit rating dips because of missed BNPL payments and/or multiple BNPL accounts
- A credit check done by a BPNL company is listed as a liability
- Missed BNPL payments paint a picture of you as an irresponsible borrower who cannot manage their finances or are stretching your expenses
- You make one too many BNPL transactions which gives banks an impression that you are under a financial hardship or incapable of managing your money.
- Banks and lenders include your BNPL transactions that have terms less than six months as living expenses when calculating your borrowing power
- You make huge BNPL repayments that might be considered a credit risk
Get a handle on your financial health with a Sunshine Coast mortgage broker
All in all, having a ‘Buy Now Pay Later’ account is not a deciding factor whether you can or cannot get approved for a home loan. It is your responsibility to manage it well and keep track of your spending.
If you need help assessing your financial situation and planning for your home loan Sunshine Coast application, talk to us – we’re experts at this! Our mortgage brokers on the Sunshine Coast will give you an obligation-free chat and help put you on the right path to owning your dream home.
