If you regularly use Afterpay or Zip Pay, you may have to reign in your spending, especially if you want to get a home loan. Though they appeal from a cash flow perspective, using Buy Now, Pay Later (BNPL) services could have a negative impact on your home loan application.
This blog walks you through the potential effects of BNPL services on your home loan application. It’ll also give you a good grasp on ways to enhance your chances of mortgage approval if you use these services frequently.
What are Afterpay and Zip Pay?
Afterpay and Zip Pay are two payment options being increasingly used by shoppers to buy goods and services in Australia and worldwide.
Afterpay and Zip Pay enable you to buy now and pay later without needing a credit card. Both services are user-friendly, and you can manage your payments through a mobile app. However, they do have some minor variations in terms of the fees, eligibility and credit limit.
What are Buy Now, Pay Later Services?
BNPL services comprise an arrangement where a shopper can immediately purchase or order a product online. The payments for these BNPL purchases are then made over a specified time. In addition, there is no interest charged on the instalments.
Afterpay and Zip Pay are two extremely popular BNPL service providers on the market. Other players in this space include Humm, Klarna, Bundll, Openpay and Brighte, Affirm and Latitude Pay, to name a few.
How Does Buy Now, Pay Later Affect Home Loan Applications?
BNPL service providers like Afterpay do not implement credit checks nor report information to credit bureaus. It implies that since they cannot influence your credit score, they technically cannot affect your ability to approve a home loan.
Nevertheless, the home loan application process is multifaceted. The extent of your BNPL usage could affect your home loan application indirectly.
Here are some ways how:
Late Repayment History
Providers like Zip Pay share your information with credit reporting agencies, card issuers, banking institutions, digital wallet providers, debt collection agencies and other service enablers.
In contrast, a service provider like Afterpay typically won’t run a credit check when you open an account. Nonetheless, terms and conditions allow them to report to the credit authority if they notice any negative activity associated with your account.
For example, defaults, late payments, chargebacks or missed payments on a credit card linked to your BNPL account. Once they appear on your credit history, it could affect your credit score.
Read our insights on how credit scores affect your home loan application and what constitutes a good credit score.
Your bank statement is one of the lenders’ most critical reference points when assessing your loan application. When considering your loan application, most banks and lenders look for indicators that show you have enough money to make timely home loan repayments.
Your banker and other credit providers will review your application in light of your income and expenses. So even though it won’t be evident on your credit report, your BNPL transactions will reflect in your bank statements. This will help gauge the extent of your BNPL debts.
Banks and lenders have their policies for assessing BNPL transactions. In sum, since banks consider BNPL as an ongoing liability or living expenses, it can reduce your borrowing power and affect your ability to secure a loan.
Our borrowing power calculator can help you gauge how much you can borrow based on your financial situation.
Poor Borrowing Habits
Your credit provider will request to see your bank statements to provide evidence of your other expenses when reviewing your loan application. For example, if your BNPL bills account for a significant chunk, and/or you are often behind on repayments, it may be a sign that you’re not good at managing money.
While late payments can impact your credibility, how you repay your debt can also affect your ability to borrow money. For example, if you use your credit card for your Afterpay payments, banks may treat it as a red flag that you cannot manage your funds properly or face financial hardship.
Further, they may be concerned that home loans may be even more challenging in your financial situation if you can’t meet small expenses.
Negative Credit Score
BNPL service providers like Afterpay may not conduct credit checks. However, others like Zip Pay will check your credit rating as if you’re applying for a credit card.
This way, even if you apply for an account, it will feature on the credit record maintained by credit reporting bureaus and potentially affect your credit rating.
Should You Close Your Account Before Applying for a Home Loan?
No, you need not close your account if you apply for a home loan. This is mainly because using the BNPL facility does mean you’ll automatically get a negative consideration on your application.
Typically, if the amount of debt does not lead to missed or late repayments, you should be in the clear.
In addition, you would need to consider a few factors, including your income, expenses, and the amount you want to borrow.
Here are two possible scenarios you could consider depending on your lender:
You Close Your Buy Now, Pay Later Account
Depending on your account, for example, Afterpay. Since your credit rating is affected only if there’s an adverse situation, closing your Afterpay account will likely not affect your credit score.
In contrast, some lenders may suggest you close the account if you have many ongoing debts. You could even voluntarily consider closing it. That will be one less expense to consider while reviewing your application.
You should notify Afterpay via email if you plan to close your Afterpay account. All your outstanding expenses will have to be cleared to initiate the closing. Furthermore, you may have to provide your credit provider with evidence that your account is closed.
Many home loan borrowers who use this option close their Afterpay account for a few months during the application stage. Once their loan gets approved, they reopen a new account.
You Do Not Close Your Buy Now, Pay Later Account
You could choose not to close your Afterpay account while applying for a loan and be straightforward about the money you currently owe and your average monthly repayments.
Depending on your lender, this could increase your credibility and speed up your loan application process.
Notably, if you have AfterPay and ZipPay accounts, be sure to mention this in your mortgage application. Typically BNPL terms, which are less than six months, are considered living expenses. For terms that are more than six months, they are regarded as personal loans.
Also, your BNPL amount will be treated like a credit card if you have a credit limit but no maximum term.
Simply put, lenders’ perceptions of Afterpay vary. Therefore, your research will help you find a lender that ticks all the boxes.
How to Improve Home Loan Approval Chances with an Afterpay/Zippay Account?
If you have an Afterpay/Zip Pay account, doing the following could better your prospects of getting approved for a home loan.:
Monitoring Your Credit History and Score
Your credit score will be vital in determining which lender to go with and the interest rate on your home loan. Therefore, you should check your credit score to understand it and if you need to improve it before applying for a loan.
Equifax, Illion and Experian are Australia’s leading bureaus from which you can order your credit report. On getting your copy, check the information for accuracy and contact your lender directly to remove any incorrect entries.
BNPL services like Afterpay can be a handy budgeting tool to keep your expenses in check without entering into a traditional credit product. As long as you make your repayments on time, you make purchases more manageable with Afterpay’s payment system. Moreover, since repayments are generally interest-free if paid on time, it can be better than having a credit card.
Ensure you’re making your repayments on time, and you shouldn’t encounter any problems.
Above all, consciously avoid using Afterpay to purchase things you cannot afford easily. Even a few costly purchases could significantly build up your Afterpay repayments. In addition, if your lender may think it’s a habit, you’ll continue with they may reduce your borrowing capacity.
Now that you’re considering applying for a home loan, try to stay within a reasonable budget.
Use Your Debit Card Only for Afterpay Repayments
Strictly using your debit card for Afterpay payments will help you be in control of your expenses. In addition, it will help prevent huge credit card bills that could potentially impact your home loan application.
Set reminders to ensure there’s enough money in your bank account. This will help you avoid late or missed payments.
Reduce Your Overall Debt
A universal hint for home buyers considering a mortgage is to try and clear off outstanding debts - including your BNPL payments - as much as possible. This will help you enhance your borrowing power and, consequently, your chances of getting your home loan approved.
Close All Your Unused or Unnecessary Credit Cards
If you don’t require a particular credit facility or have multiple credit cards, closing some before you apply for a home loan would be a good idea. Even if you have zero outstanding on that specific credit card, the credit card limit is still a credit facility for you and will likely be considered your debt.
Consider Using Joust to Help You Find the Perfect Home Loan
Navigating the home loan marketplace to borrow funds can be challenging. There are so many products out there; comparing them can take a lot of work.
Here’s where our Instant Match tool can help. Just tell us what you’re looking for. Then, we’ll offer you the three most suitable home loans from reputed Aussie lenders that match your borrowing capacity.
Even better, our lenders will contact you to discuss your options, and you have no obligation to proceed.
Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.