That dress you bought on Afterpay six months ago could impact your ability to get a home loan.
Banks and lenders will now treat any buy it now, pay later (BNPL) agreement as an outstanding debt when lenders assess home loans, which could fall on first-time home buyers.
Previously, buy now, pay later debts were listed as living expenses when borrowers assessed loans. But industry watchdog APRA stepped in, insisting on a change to the rules.
APRA clarified in a letter to lenders that buy now, pay later programs must be included in debt-to-income ratios. This change in lending standards must be followed by all banks and lenders from September this year.
Simply put, this means banks will have to consider your purchase now and pay later as “debt” when determining how much you can borrow. Coupled with rising interest rates, this may be another blow for Australians looking to buy their first home.
Size the sector
There are over 30 buy now, pay later companies in the Australian market, including stalwarts Afterpay, Zip, Klarna, Openpay and Commonwealth Bank’s new offering, StepPay, and NAB’s Now Pay Later.
According to a research report on the economic impact of BNPL by the Australian Finance Industry Association, there are 5.9 million active accounts in Australia, with a collective value of $11.9 billion. The average transaction value is $151, with some providers lending for purchases of up to $30,000.
Buy Now, Pay Later has been particularly popular among young Australians, who tend to view the modern version of lay-buy as a better alternative to credit cards. The industry exploded during the pandemic as transaction volumes increased 43% in the first year Covid-19 hit, Deloitte research shows.
The industry has so far escaped regulation, but consumer groups are pushing the government to put in place new rules to keep Australians out of debt, particularly as economic conditions change and the cost of living increases.
A recent CHOICE survey found that over the past 12 months, some 21% of people who have used a buy now, pay later loan in the past 12 months have used it to pay for essentials, such as food, groceries or utilities. The consumer group warns that while many consumers are using buy now, pay later responsibly, it is a potential debt trap for others.
Stricter restrictions are needed
Payments services chief executive Brad Kelly said the impact on customers buy now, pay later is a potential doomsday scenario, as lenders can operate under their own code of practice. He describes the area as a “small but noisy corner of lending space”.
The recent inclusion of buy now, pay later in debt for home loan application purposes means that a dress you bought 12 months ago through a lender could affect whether a lender Whether or not you approve your home loan application, he says.
“Even if you paid for the dress, the fact is that having a relationship with a buy now, pay later business will impact your ability to buy a home under this new change,” says Kelly.
The reason for this, he explains, is that lenders will be able to see that you had a buy-now-pay-later loan on your credit score, but they can’t see how much you’ve borrowed, or whether you’ve paid. this debt. back, he said.
This means the loan could be for $50 or up to $30,000. And the more buy-now-pay-later deals you’ve made, the more likely you’ll get away with it when trying to get a loan.
“Because of the way the law is written, the bank has to assume that these agreements are all maxed out because no credit checks have been performed (by BNPL’s suppliers) on these transactions,” Kelly explains.
Navigate a home loan
The best approach for potential lenders is to look at your debt-to-equity ratio, which refers to the proportion of your income that is used to pay off your debts. Paying off any purchase now, paying your debts later will lower your debt to income ratio, making you a better customer to lenders.
Keep in mind that debt could signal to a lender that you are having trouble managing your finances. If you have multiple buy now, pay later debts, that could also impact your credit score.
The key here is to not become too reliant on the industry to make purchases and to ensure your buy now pays off later debts are paid off when applying for a home loan.
In fact, some banks may require that your purchase be made now, that you pay off all of your debt later before they even consider approving your home loan application.
How to improve your chances of getting approved for a home loan if you used BNPL:
- Don’t have multiple accounts with a range of lenders because it’s hard to quantify how much you owe.
- Establish a savings plan and, ideally, ensure that you repay your financial commitment on time.
- Don’t buy now, pay later if you have other debts and financial commitments, as this sends the message that you are not good at managing your finances.
- Don’t try to hide the fact that you bought now, pay the debt later. Be upfront about it.
- Try to pay off your purchase now, pay off all debt later before applying for a home loan.
- Check your credit score before applying for a home loan and inquire about any past purchases now, pay future debts, or other unrecognized lending activity.
- There is a range of buy it now, pay later companies and each offer different terms and conditions. Read the fine print to find out how your debt will be handled.