Don’t use buy now, pay later services if you want a home loan, mortgage brokers warn
Australians who are hoping to get a mortgage have been given a warning as pressure on Afterpay and other providers ramps up.
Finance experts have warned house hunters to “stay away” from buy now, pay later platforms such as Afterpay, with spending habits viewed as a hurdle for home loan applications.
“Definitely try and avoid it,” Pink Finance founder and mortgage broker Nicole Cannon told news.com.au. “It’s something I do have frequent conversations with my clients about.
“For the consumer, Afterpay and Zip may seem great from a cashflow perspective because they can pay off their items over a period of time, but most people don’t realise credit inquiry is listed on their credit file.
“So they’ve already got listed a $1000 or $2000 credit limit which the banks have to assume is maxed out which can reduce your borrowing capacity.”
Mrs Cannon says tighter lending requirements in the wake of the financial royal commission have led to banks taking a more detailed approach to investigating mortgage applicants.
And buy now, pay later platforms are a particularly concerning red flag because it is viewed by lenders as an ongoing expense.
“If you’ve made a whole heap of purchases four weeks ago, you’ve still got two more payments to come out,” she said. “They will then see two months worth of that expense and they will then annualise that expense.
“That could add an extra $3000 or $4000 to living expenses.
“We’ve often had banks request to prove that the account is closed down and they make it difficult to do that.
“For some people who are trying to buy a place and they’ve found a property that they’re interested in and time is of the essence, that can sometimes delay getting their approval which could sometimes delay people missing out on buying the property they fell in love with.
“If you know that you’re going to be applying for a mortgage within three months, make a conscious effort to have any Afterpay agreements going through so then the bank can see there’s no payments being made so therefore it’s not an active account.
“You’ve got more negotiation power with the bank if they can see there’s no repayments going out of the account to prove it’s not an active account.”
Mortgage Choice chief executive Susan Mitchell echoed the warning in a comment provided to news.com.au.
“If you’re looking to apply for your first home loan in the near term, stay away from buy now pay later services,” she said.
“If you are on the edge of servicing for a home loan, or you haven’t declared After/Zip Pay transactions as part of your home loan application, your application may be questioned, which could delay your approval time.
“You could also stand the chance of having your borrowing capacity reduced or in a worst-case scenario, have your loan knocked back.
Mrs Mitchell said lenders assume buy now, pay later customers will continue purchasing through the platform into the future.
“What we are seeing is people use these services even though they have the money to buy the product outright simply because it’s convenient,” she said.
“If you do have money to pay for it, avoid paying for the purchase on Afterpay.”
Mrs Cannon said Pink Finance now actively investigates clients’ use of buy now, pay later providers.
“In our fact find, we actually have the specific question now: ‘Do you have Afterpay or Zip?’
“We were finding it was being undisclosed, so we now specifically ask that question so it jolts them to think about it.”
Investment bank UBS advised investors last week to sell their shares in Afterpay after its survey found that users of the buy now, pay later platform tended to have more debt and had been declined for credit cards in the past.
Afterpay chief executive Anthony Eisen said at a conference last week in Melbourne the company’s internal research didn’t reflect its customers being viewed unfavourably for credit applications.
“The most compelling statistic I get out of that is that 70 per cent of respondents who use Afterpay say they’re using credit less,” he said, according to The Age.
“Our customers aren’t low socio-economic. They are customers who don’t want to use credit cards and fall into a debt trap for their lifestyle purchases.”
In a statement provided to news.com.au, the company said most customers repay on time.
“Afterpay is the opposite to traditional credit products — we have in-built customer protections, we reward positive payment behaviour, and our users cannot get trapped in debt,” the spokesperson said.
“We are about mutual trust, responsible spending behaviours and flexibility in how people pay.
“Around 95 per cent of Afterpay payments never occur a late fee, which means payments are made on time and the service is completely free for the user.
“If you’re late on a payment we suspend your account and you cannot continue to purchase until you’re up to date.”
The warning comes after the Reserve Bank of Australia said on Friday it would consider introducing policy to allow retailers to enforce a surcharge on customers who use the buy now, pay later (BNPL) platforms.
“BNPL services are relatively expensive for merchants to accept, and they usually restrict the ability of merchants to apply a surcharge to pass on these costs to the customers that directly benefit from the service,” the RBA said.
“Accordingly, an issue for the bank is whether policy action in relation to these no-surcharge rules should be considered.”
The central bank said the use of buy now, pay later platforms was more expensive to operate than EFTPOS machines but were restricted by companies such as Afterpay from passing on the surcharges.
“This can be problematic for merchants that feel compelled to offer BNPL services as a payment option for competitive reasons but are unable to recoup the merchant fees from the customers that directly benefit from the service,” the RBA said.
In a statement provided to news.com.au, Zip co-founder and director Peter Gray said the users of the platform had a healthy credit score.
“The average Zip customer has a higher credit score than that of credit card applicants and most balances are cleared in months not years,” he said.
“This highlights the credit quality of our customers, and demonstrates how our customers are actively paying down their debts and not accruing long term balances and high amounts of interest.”