How After-Pay and Other Buy-Now-Pay-Later Schemes Can Affect Your Home Loan Chances
Sorting out your finances in preparation for your first (potential) home loan? You may check every box when it comes to savings, expenses, down payment amount and income stream, but there’s one factor you may have forgotten – and it’s easy to do.
Ah, Afterpay. The brilliant ‘buy now, pay later’ service that keeps our bank accounts in surplus no matter how many Christmas presents we buy and stockpile throughout the year… but uh oh. Now you’ve accrued a debt, and you’re worried how that will look on your home loan application.
As lenders often look at how much you owe on your credit cards and loans, your Afterpay account might just affect your chances at getting the right home loan for you.
Lenders will also look at your repayment history, so if you have a track record of forgetting to pay your credit cards, Afterpay or your payments are bouncing, banks and other lenders may be even extra cautious about approving your loan.
How do lenders assess finances?
To put it simply, lenders will assume that the cap on your credit card or your chosen ‘buy now, pay later’ scheme is the amount you’re going to spend each month. So if Zip for example grants you a $2000 limit, lenders assume you are ‘borrowing’ $2000 each month. If you have a credit card with a cap of $10,000, they will treat this in the same way. Yikes. This is why it is important to spend wisely and use credit cards and Afterpay-type services sparingly.
Direct from the source
A quick visit to the Afterpay help page will ease your stress, but it may not relieve the tension entirely. Afterpay says use of their payment service should not affect your ability to be approved for a home loan due to their lack of reporting to credit bureaus or agencies.
However, their terms and conditions offer deeper insight into the issue. Any negative activity occurring within your account (including late payments or avoidance of payment) must be reported by Afterpay to the relevant credit authorities. And this is where you could face home loan trouble.
Your bank or lender may also require details of your regular expenses, and if you frequently use Afterpay, they will need to know where you stand on repayments.
While simply applying for Afterpay won’t negatively impact your credit score, there are still a number of reasons for home loan applicants to be aware.
Late or missed payments, defaults and chargebacks will be reported to the credit bureaus and authorities. If you don’t pay a due account, you may be reported and face the consequences of a negative hit to your credit score.
Do you use Afterpay sparingly? Do you ensure your cash flow remains in the green?
When banks or lenders assess a home loan application, they want to know whether you can meet your ongoing mortgage repayments; they will do this by studying your income and expenses. Avoid excessive purchases on Afterpay and other ‘buy now, pay later’ schemes, as the banks will likely factor this in to your home loan outcome.
Lenders typically want proof of how you spend your money by looking at your bank statements. Alarm bells will ring for the lender or bank if they see evidence of poorly managed finances; this could mean excessive use of the payment service or a credit card being used to pay off your Afterpay account. Think about it. If you can’t afford small repayments, how will you manage to pay off a home loan?!
Afterpay may be considered the most accessible scheme due to its lack of credit check when you apply for an account, but don’t be fooled when it comes to other such services.
Zip Pay and a number of other ‘buy now, pay later’ services will run a check when you sign up for an account; this means that just applying for an account will appear in your credit history and affect your credit score, whether you use the account or not.
But Kitty, I closed my Afterpay account! Should I still be concerned?
If you’ve made all Afterpay repayments on time, and have since closed your account, there is no need to worry. Afterpay will only appear in your credit history report in the event you miss your repayments. Therefore, closing your account won’t impact your credit score. Hurrah! In fact, some banks or lenders may even ask you to close your Afterpay account before approving your home loan application, so you’re onto a good thing, kiddo.
So there you have it. A carefully managed Afterpay account with no late payments won’t affect your credit history, but if you’ve been a bit of a Sally Spender during recent COVID lockdowns and missed some of your mandatory repayments, your credit history might show that.
Best advice if you’re applying for a home loan is to avoid use of ‘buy now, pay later’ schemes where possible – especially those which are automatically added to your credit history upon application. And keep in mind how many borrowing accounts you hold and the amount you are able to borrow in each, as lenders typically steer clear of applicants with multiple credit accounts, and especially those with outlandishly high limits.