I am considering whether to use Buy Now Pay Later, but what exactly is it and will it affect my mortgage application when I buy a house later this year? RQ
Lenders need to make responsible decisions about whether borrowers can truly afford a mortgage
MailOnline’s Property expert Myra Butterworth said: Borrowers who are over-stretched financially can be a red flag for lenders as they risk being unable to repay their mortgage.
Heavy use of Buy Now Pay Later schemes may indicate to a lender that this is the case and the borrower is struggling to manage their finances.
A lender needs to make a responsible decision about whether a borrower can truly afford the mortgage before it is approved.
While some forms of Buy Now Pay Later borrowing still won’t show up on a borrower’s credit file and affect their credit score, lenders will still be able to see evidence of it on their bank statements, so it could still impact the mortgage application.
In addition, Klarna is going to start reporting customers’ borrowing and late payments to credit agencies from 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 property purchase.
Nicholas Mendes, of mortgage brokers John Charcol, said: Buy Now Pay Later schemes provide an opportunity to buy something on credit without having to pay for it until a later date.
This might be through regular interest-free instalments. Typically, this is across three instalments or after an interest-free period of 30 days.
It is used as a payment method at some high-street shops, but it’s more commonly used by catalogues and online retailers.
Their products can 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 include Klarna, Clearpay and Laybuy. These companies offer a range of payment options.
Buy Now Pay Later schemes provide an opportunity to buy something on credit without having to pay for it until a later date
Impact on a mortgage application
As part of a mortgage application, lenders will gather certain information to decide whether the borrowing requested will be affordable.
For a decision in principle and mortgage application, this would typically include personal details, income, and expenditure.
Lenders will also perform a credit search – soft or hard -, which will pick up any commitments you’ve currently applied for.
Once this has been completed, a lender will come to a decision, taking into account all the information.
How Buy Now Pay Later commitments will affect a mortgage depends on several factors – the amount outstanding, how much you repay each month, and when the arrangements will be paid off.
Habits such as continuous loans, overdrafts, Buy Now Pay Later, and credit card minimum payments, could give an impression to the lender the applicant is too reliant on short-term credit.
As a result, a reduced max borrowing amount could be provided, or a lender could decline the application as they feel the risk is too great with the extra expense that comes with being a homeowner.
Not all lenders allow you to input Buy Now Pay Later loans on a decision in principle, only at submission can this become an issue once a hard search is done.
You could have a decision in principle but it isn’t until an application has been submitted and a hard search is done that any Buy Now Pay Later commitments are picked up, resulting in a revised decision.
Lenders make a distinction on short-term verses longer-term Buy Now Pay Later.
Purchasing a smaller item, such as a £60 coat that you choose to defer paying for 30 days, interest-free, is unlikely to endanger your mortgage as this will be paid back by the time your mortgage has completed.
But a more expensive item, such as a £900 fridge split into six payments would be a debt commitment that will impact how much spare cash you have each month and therefore will need to be taken more seriously.
As with credit cards on zero per cent over at least 24 months, lenders could end up taking 1.5 per cent of the balance as a monthly commitment. But no lender has yet set any formal criteria on this.
Things to consider
In the run up to looking at purchasing a property or remortgaging, think about your budget and track the amounts you are due to repay.
Ensure that all payments are made on time to avoid any late payments showing on your credit file and potential late fees charged by your Buy Now Pay Later provider.
While some Buy Now Pay Later options don’t show on your credit file, others do.
The key thing to take into consideration if you’re going to be applying for a mortgage, either to purchase a property or re-mortgage your home, is that it’s best to avoid using payment plans, payday loans, or any other form of short-term finance for at least six months beforehand.
Also, make sure you’ve either cleared any credit cards or are repaying the amount owed as quickly as you can, rather than just servicing the interest and minimum payment.