Currently, in Australia, buy now, pay later (BNPL) platforms are available that enable you to pay off your purchases by staggering repayments over a certain period with no interest charged. The most popular this is Afterpay, which can be used in-store and online too.
But how do these buy now, pay later options impact your ability to borrow funds when you need to? Meaning, does Afterpay affect your home loan application?
What is Afterpay?
Afterpay has become increasingly popular over the years, with more Aussies opting to use this platform while buying essentials, gadgets, furniture and other products. Afterpay allows you to purchase whatever you want and then you can pay for that particular product in instalments.
When you create an Afterpay account, you need to link it to your debit or credit card. Depending on the product you purchase and the repayment option you choose, the system will deduct the amount from your account directly. While there is usually no interest charged, you will be charged a late fine if you miss a repayment.
Why do lenders consider Afterpay in your home loan application?
When you apply for a loan, the lender will assess a few key things: your income, expenses and liabilities. A lender will want to know all about your spending habits and your debts to see how they may impact your ability to pay the mortgage. This is because they want to ensure that your budget can reasonably afford mortgage repayments, so any other debt is seen as a risk or a liability.
So while considering your application, most lenders will factor in every loan or debt you have, including small repeat payments like Afterpay, to ascertain whether or not you can afford to borrow money to buy a house.
BNPL purchases may also fall under your “regular ongoing expenses”. Meaning, if you make one or two purchases a month, a lender may assume you’ll continue to do this for the life of your loan, and reduce your borrowing capacity accordingly.
What is the role of Afterpay in your home loan application?
When applying for a home loan, one thing that lenders will assess right away is your credit score. As Afterpay doesn’t carry out a credit check nor does it charge any interest, simply applying for an Afterpay account will not have a negative impact on your overall credit score. So, why does Afterpay affect getting a home loan?
- Debts may impact your credit history
Even though Afterpay doesn’t check your credit score or history when you apply for an account, their terms and conditions do state that they are authorised to report any negative activity to credit authorities. So, if you’re callous about the repayments for Afterpay, it might have a negative impact on your credit score, which directly hurts your home loan application.
- Lenders consider all your expenses
Even though Afterpay is considered a fairly small repayment amount, lenders will consider all your expenses while reviewing your home loan application. If you have too many sources of debt and borrow a considerable amount from Afterpay every month, lenders usually factor this into their assessment, as it directly impacts your ability to repay the mortgage.
- It may look like you can’t manage your money and expenses
Most lenders will ask for your bank account statements to assess your income and expenses. If they notice that you need to pay hefty Afterpay bills every month, or are late in repaying the amount and often pay penalty fees, lenders might get the perception that you’re not good at managing your money.
Is closing your Afterpay account beneficial for a home loan?
Theoretically, having an Afterpay account doesn’t directly impact your credit history, unless there’s a negative event. Hence, closing your Afterpay account would most likely not impact your credit score. However, if you have too many on-going debts, some lenders may ask you to close the account.
Even if they don’t, you could consider closing it just to earn some brownie points with lenders, as it is one less expense to take into account while assessing your loan application.
On the other hand, if you don’t close your Afterpay account while applying for a loan, it helps if you’re upfront with lenders about how much you owe currently and your monthly repayments on an average. Not only can this increase your credibility, but it can also prevent any unnecessary delay in your loan application process.
Different lenders have different perceptions of Afterpay and its impact on your home loan application. You should consider comparing various lenders to find the one that suits your requirements.