Recently, short term financing for retail purchases have become all the rage. With a slew of new providers hitting the market, such as AfterPay and Zippay, and a hoard of retailers flocking to the service we are now starting to see the roll-on effects that heavy use of these services has on our credit ratings.

These buy now pay later schemes, whilst attractive for consumers, also present a risk for anyone who is preparing to buy their first home. Mortgage brokers across the country are warning borrowers that these services are a formal loan, despite their shorter  term and carry the same risks as larger, more traditional loan facilities when not serviced correctly.

Some lenders are also warning that frequent use of these facilities may raise eyebrows when assessing a home loan application as it is an indicator that the person applying is potentially living beyond their means.

What are the risks?

For anyone who is considering applying for a home loan, the use of AfterPay and similar services should be considered carefully as there is a very likely chance that this can harm your chances of being approved by major lenders.

1. Increased Credit Limits

Borrowers should know that just like any other loan or credit facility, your AfterPay credit limit will be included in the assessment of your overall existing credit limits. Credit that is already extended to you is a metric that is used by lenders to calculate overall risk levels now and in the future. Regardless of whether you credit balance is zero now, it doesn’t mean that it will stay that way. Lenders use this to see what your potential future financial obligations might look like if your circumstances change and factor this into whether you can comfortably afford payments.

2. Unnecessary enquiries on your credit profile

Just like any other credit facility, applying for “buy now pay later” accounts will most likely cause an enquiry on your credit records. Too many enquiries are a red flag for lenders, as this indicates that you need credit to be able to service your spending and lifestyle. If you start applying for a number of accounts with different providers, then your credit file activity will come into question.

3. Risk of penalties if payments are missed

Small loans can be easy to overlook as the penalty for not paying is relatively smaller than a larger loan. If you accidently overspend, and your account can’t be debited this will put a black mark on your profile and potentially cause a flow on effect. People looking to apply for a home loan in the coming months need to be vigilant when it comes to paying debts and bills on time as this is a big factor that lenders consider when deciding whether to approve your application.

Already using AfterPay and planning on buying your first home? What to do next?

If you are planning on buying your first home it would be best to close any “Buy Now Pay Later” accounts and start showing a good history of living within your means. The risk that these facilities pose to your credit rating and overall attractiveness to lenders is very real. If you have any existing purchases on BNPL, then either pay them off in full and close the account or ensure that your payments are made on time in full.

If you have any concerns or questions, it would be best to speak with a home loan expert in order to start planning for success. Our team of experienced mortgage brokers will be able to assess your current credit situation and provide guidance on what you need to do in order to prepare for making a home loan application that has a high chance of success.

Contact us if you have any questions. 

Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au