Buy now pay later services like Afterpay and ZipPay are raising questions with lenders about a borrower’s ability to repay their home loan.
It gives the impression that borrowers do not have sufficient amounts of cash on standby and are living paycheque to paycheque.
Banks and lenders are closely monitoring the daily spending habits and expenses of their potential clients before approving them for a home loan.
Why are more and more Australians using Afterpay?
Buy now pay later services like Afterpay and zipPay are gaining traction in Australia, especially among the younger demographic.
60% of their business is customers aged between 18 to 34 years old.
As of March 2019, there are over 2 million customers on Afterpay platform.
While the number of transactions for buy now pay later services only started at 50,000 transactions in 2016, it has over 1.9 million transactions as of June 2018.
Their services allow a customer to purchase goods or services without paying for them upfront.
Payments are made in instalments with no interest charged, since these services are exempt from the National Consumer Credit Protection Act (NCCP)
However, even without interest rates, you still have to pay late fees (if you can’t keep up with payments.)
Since these services are easy to use, does not charge interest and convenient, they have changed the spending habits of people.
People are making spontaneous purchases and spending more than they previously would have.
ASIC research reveals that Afterpay customers owe more than $900 million as of June 2018!
How can Afterpay prevent you from getting a home loan?
To put it simply, if a lender sees that you have not been able to make the small payments on your Afterpay, then paying off a more substantial mortgage repayment is a bigger hurdle.
Matters are further complicated when you cannot keep with your Afterpay commitments.
In 2018 alone, 24% of Afterpay’s revenue came from late fees.
For the first missed payment, the customer is charged a $10 late fee with a further $7 late fee added if payment is still not made within seven days.
If the customer does not make payments, then the late fee will keep accumulating.
Furthermore, if there are orders above $40, then a late fee of 25 per cent of the original order is charged.
If you can’t be bothered to repay your late payments and let it default – then you’re not seen as a responsible borrower.
If a substantial amount of late fees are not recovered and it defaults, then it may be reported to a credit reporting agency – which will reduce your credit score.
As credit checks are a part of a lender’s criteria to see if you qualify for a mortgage, if you have bad credit due to defaults or missed payments, then the chances of your mortgage being approved are low.
Since the advent of comprehensive credit reporting, even your 24-month repayment history forms a big part of your credit score.
Furthermore, Afterpay is also included in the debt-to-income Ratio (DTI) calculation for banks and lenders.
However, if you have been making manageable and timely repayments, then it would not affect your home loan application.
How to apply for a home loan with an Afterpay?
To improve your chances of a home loan approval with Afterpay:
- Always make sure to disclose your current Afterpay balances so that your mortgage application process goes more smoothly.
- Try to reduce the amount committed to Afterpay and make early repayments whenever it is possible.
- Try not to make additional repayment commitments to your Afterpay before you apply for a home loan. This reduces your overall expenses and improves the chances of getting your home loan approved.
- Ensure that your credit card is not expiring soon and that you have sufficient funds to pay the instalments or you will be charged with late fees.
Get a free credit report to check if your Afterpay will affect your home loan application.
Get in touch with us if you are confused about the credit requirements for banks and lenders.
Call us on 1300 889 743 or enquire online.
Our brokers will assist you with your home loan application and weed out unnecessary debts to make you an attractive borrower.