I’m considering using Buy Now Pay Later, but what exactly is it and will it affect my mortgage application when I buy a house later this year? QR
Assessment: Mortgage lenders will consider using buy-it-now and pay-later programs when considering whether or not to approve someone for a loan
MailOnline property expert Myra Butterworth said: Borrowers who are financially overstretched can be a red flag for lenders as they may not be able to repay their mortgage.
Heavy use of Buy Now Pay Later programs – which offer online shoppers the option to pay at a later date or spread their purchases over multiple payments, often with an interest-free period – can tell a lender that it’s the case, and the borrower finds it difficult to manage his finances.
A lender must make a responsible decision about whether a borrower can really afford the mortgage before it is approved.
While some forms of BNPL borrowing still won’t show up on a borrower’s credit report and won’t affect their credit score, lenders will still be able to see evidence of it on their bank statements, which could have a impact on mortgage demand.
Additionally, Klarna, one of BNPL’s largest providers, began reporting customer loans and late payments to credit reporting agencies on June 1.
Borrowers need to keep this in mind if they want to present the best financial version of themselves in order to secure their home loan and proceed with their home purchase.
Nicholas Mendes, of mortgage broker John Charcol, said: Buy Now Pay Later programs offer the ability to buy something on credit without having to pay until a later date.
This can be done through regular interest-free installments. Typically, this is done in three installments or after a 30-day interest-free period.
It is used as a payment method in some high street stores, but is more commonly used by catalogs and online retailers.
Their products may be aimed at young people and families who may not have other forms of unsecured borrowing facilities such as credit cards.
The most common Buy Now Pay Later providers are Klarna, Clearpay and Laybuy. These companies offer a range of payment options.
Cash flow: Buy it now and pay later programs offer the ability to buy something on credit without having to pay until a later date.
Impact on a mortgage application
As part of a mortgage loan application, lenders will collect certain information to decide whether the requested loan will be affordable.
For a decision in principle and a mortgage application, this usually includes personal details, income and expenses.
Lenders will also perform a credit search – soft or hard – which will pick up any commitments you have currently applied for.
Once this is complete, a lender will make a decision considering all the information.
How Buy Now, Pay Later commitments will affect a mortgage depends on several factors – the amount outstanding, how much you pay off each month, and when the arrangements will be paid off.
Habits such as continuous lending, overdrafts, buy-it-now, pay-later, and minimum credit card payments could make the lender feel too dependent on short-term credit.
As a result, a reduced maximum loan amount could be provided, or a lender could refuse the request because they feel the risk is too great with the added expense that comes with owning a home.
Not all lenders allow you to grab Buy Now Pay Later loans on a principled decision, it is only at submission that it can become an issue once a thorough research is done.
You might have a decision in principle, but it’s only after an application has been submitted and a thorough search is done that all Buy Now Pay Later commitments are considered, resulting in a revised decision.
Lenders also make a distinction between short term and long term. Buy now, pay later.
Buying a smaller item, like a £60 coat that you choose to defer payment for 30 days, interest-free, is unlikely to put your mortgage at risk, as it will be paid off when your loan is mortgage will be terminated.
But a more expensive item, like a £900 fridge divided into six payments, would be a debt pledge which will impact how much free cash you have each month and therefore need to be taken more seriously.
As with zero percent credit cards for at least 24 months, lenders could end up taking 1.5 percent of the balance as a monthly commitment. But no lender has yet set formal criteria for this.
Things to consider
Before considering buying a property or a new mortgage, think about your budget and track the amounts you need to repay.
Make sure all payments are made on time to avoid late payments appearing on your credit report and potential late fees charged by your Buy Now Pay Later provider.
While some Buy Now Pay Later options don’t appear on your credit report, others do.
The key thing to consider if you are going to apply for a mortgage, whether to buy property or remortgage your home, is that it is best to avoid using payment plans, payday loans or any other form of short-term loan. – term financing of at least six months in advance.
Also, make sure you clear all credit cards or pay off the amount owed as soon as possible, rather than just paying interest and the minimum payment.