The Hidden Impact of Buy Now, Pay Later on Your Mortgage Application.

As a Mortgage Adviser, I’ve seen countless first-home buyers excitedly prepare for their big purchase, only to face unexpected hurdles. One of the most common stumbling blocks? The seemingly innocent use of buy now pay later (BNPL) services like Afterpay. Let’s dive into how these modern payment methods can affect your mortgage application and what you can do about it.

What is Buy Now Pay Later?

BNPL services, such as Afterpay, Laybuy, and Zip, have exploded in popularity among Kiwis. They offer a tempting proposition: get your goods now and pay for them in instalments, often interest-free. It sounds great, right? But when it comes to your mortgage application, these services can be more trouble than they’re worth.How Banks View BNPL

When you apply for a mortgage, banks look over your financial history with a fine-tooth comb. They’re looking for evidence that you can manage your money responsibly. Here’s how they view BNPL:

1. Credit Facility: Banks often treat BNPL accounts as a type of credit facility, similar to a credit card. Even if you’re not using it, the mere existence of the account can affect your borrowing power.
2. Spending Habits: Frequent use of BNPL services can be seen as a red flag. It might suggest to lenders that you’re living beyond your means or struggling to manage your cash flow.
3. Debt-to-Income Ratio: BNPL repayments are factored into your ongoing expenses, which can increase your debt-to-income ratio and reduce the amount you can borrow.

Let’s break down how BNPL can affect your application:

• Reduced Borrowing Power: When lenders assess a home loan application, they actually take into account your BNPL limits, not just the balance you have owing. Even if you’ve never missed a payment, having multiple BNPL accounts can significantly reduce your borrowing capacity. Lenders will calculate your borrowing potential based on the assumption that you could draw up to the limit at any time, regardless of your intentions.?
• Credit Score Concerns: While not all BNPL providers report to credit bureaus, some do. Missed payments can negatively impact your credit score, making it harder to secure a mortgage.
• Bank Statement Scrutiny: Lenders will comb through your bank statements. Regular BNPL repayments, especially multiple ones, can raise eyebrows and lead to questions about your spending habits.

What First-Home Buyers Can Do

If you’re serious about buying your first home, here are some steps to take:

1. Close BNPL Accounts: At least three months before applying for a mortgage, close all your BNPL accounts. This gives you a clean slate in the eyes of lenders.
2. Avoid New Sign-ups: Resist the temptation to use BNPL services, even for small purchases. Every little bit counts when you’re trying to impress a lender.
3. Budget and Save: Instead of relying on BNPL, focus on budgeting and saving. This demonstrates financial responsibility to potential lenders.
4. Check Your Credit Report: Regularly review your credit report to ensure there are no nasty surprises from past BNPL use.
5. Be Honest with Your Adviser: If you have used BNPL services, be upfront with your Mortgage Adviser. We can help strategise to minimise the impact on your application.

The Bigger Picture

While BNPL services can be convenient, they’re not worth jeopardising your dream of homeownership. As a Mortgage Adviser, I’ve seen too many first-home buyers caught off guard by the impact of these services on their applications.

Remember, buying a home is likely the biggest financial decision you’ll make. It requires discipline and often sacrifice. By steering clear of BNPL and focusing on traditional saving methods, you’re not just improving your chances of mortgage approval – you’re setting yourself up for long-term financial success.

In the end, the satisfaction of owning your own home far outweighs the short-term gratification of buy now pay later. So, put those BNPL apps on pause and keep your eyes on the prize, reach out if you need a hand!

Read on or give us a call to find out more.

Rodney, Dallas, Nigel, and the Agile Team!