Banking

Is buy now pay later use considered by mortgage lenders?

Potential homebuyers looking to take out a mortgage are being warned about using buy now, pay later schemes, after it was revealed that four major lenders are quizzing borrowers about their use when they apply for decisions in principle.

Buy now, pay later allows shoppers to defer or split payments when shopping online. Some of the biggest providers in the market include Clearpay, Laybuy and Klarna.

Use of these schemes surged during the pandemic as more of us shopped online.

However, consumer group Which? has warned that many users did not realise that some mortgage lenders consider BNPL a type of debt, and treat it in the same way as a loan or credit card.

Scrutiny: Users of popular buy now, pay later apps such as Afterpay and Klarna may need to disclose this when they apply for a mortgage – and lenders could consider it a risk

Which? researchers applied for a mortgage decision in principle online with 10 of the UK’s biggest lenders, to find out how much borrowers’ BNPL activity was being scrutinised.

Which? reported that four lenders – Barclays, Halifax, Nationwide and TSB – specifically asked for details of BNPL arrangements alongside other credit commitments such as loans and credit cards.

They usually asked about the amount outstanding on each arrangement, and whether the debt would be fully repaid before the mortgage started.

Conversely, five lenders – HSBC, NatWest, Santander, Virgin Money and Yorkshire Building Society – made no mention of BNPL on their online decision in principle forms.

Coventry Building Society does not accept online applications, but confirmed that it did not ask about BNPL when customers apply for a decision in principle.

Even if they do not ask for these details when a decision in principle is requested, the information will come to light when a formal application is submitted later in the mortgage process.

Submitting a formal application for a mortgage involves your lender conducting a ‘hard’ credit check, which involves accessing your credit report and requesting bank statements to ensure your finances match up with your application.

While some BNPL providers, including Klarna and Clearpay, don’t leave any trace of your borrowing on your credit report, others such as Laybuy and OpenPay do.

Which? researchers filled out online mortgage applications to see when BNPL borrowing was picked up. It found that four lenders asked for information at the decision in principle stage

Which? researchers filled out online mortgage applications to see when BNPL borrowing was picked up. It found that four lenders asked for information at the decision in principle stage

And even if it is not present on your credit report, lenders may pick up on payments to BNPL providers on bank statements.

Several confirmed to Which? that they looked for BNPL commitments when analysing bank statements.

Mortgage lenders’ view of the borrowing will also depend on the length of the credit agreement, and whether the customer is paying interest.

Although most schemes offer to delay smaller payments for 30 days or up to six weeks interest-free, some allow customers to mix these offers with longer borrowing options on big ticket items which charge interest.

Monzo, for example, recently launched Flex, which offers a limit of up to £3,000 and the chance to split the cost of purchase over £30 over three instalments interest-free, or for a longer period of six to 12 instalments at a typical 19 per cent APR.

Lenders told Which? that they classed this type of borrowing along with more traditional types of credit.

Barclays took the strictest view on BNPL, saying that all active BNPL arrangements were considered ongoing financial commitments, like loans or credit cards.

Nationwide and Coventry Building Society said they only looked at formal BNPL agreements which looked like a traditional finance agreement bearing interest, and those that had more than six months left, when calculating affordability.

Which? said: ‘A £50 jacket that you choose to defer paying for 30 days, interest-free is unlikely to scupper your mortgage, as this will most likely be paid back by the time your mortgage is granted.

‘However, a £500 washing machine you’ve chosen to 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.’

Could BNPL really kibosh your mortgage?

Depending on the amount of BNPL borrowing a customer has relative to their income, how many BNPL agreements they have, and the timescale in which the money is is set to be repaid, this could result in the amount they can borrow being reduced, or their application being rejected altogether.

 While BNPL arrangements by their very nature might not have a big bearing on affordability, this doesn’t remove the potential for lenders to make further enquiries

Mortgage broker David Hollingworth 

Ultimately, the lender will need to decide whether or not the customer is, in its view, too reliant on short-term credit.

However, Which? was clear that BNPL had not been blacklisted by lenders. Instead, it said, they used it as one of many variables to assess a customers’ financial situation.

Mortgage broker David Hollingworth of L&C said: ‘While BNPL arrangements by their very nature might not have a big bearing on affordability, this doesn’t remove the potential for lenders to make further enquiries around something on a bank statement.

‘If a borrower is using BNPL on a very regular basis and to a higher volume then it could require further justification to the underwriter.’

What can BNPL users do to maximise their mortgage chances? 

 Which? provided the following advice on how BNPL customers could improve their chances of getting the green light on a mortgage application. It said: 

Cutting down on BNPL borrowing could be the kety to mortgage acceptance

Cutting down on BNPL borrowing could be the kety to mortgage acceptance

Cool BNPL borrowing If you can avoid taking out BNPL agreements in the lead up to applying for a mortgage, then do so. Barclays told Which? it recommends all prospective homeowners not enter into any new credit agreements before applying for a mortgage and ensure all short-term debt is paid off before submitting a mortgage application. 

Keep up with repayments Keep on top of your existing BNPL commitments and your overall level of debt. If you have a credit card, overdraft, loan and various BNPL commitments make sure you can afford to pay them back. 

Give all the information you can Be honest on your decision in principle form if it asks about BNPL spending, or if you use a mortgage broker, make sure you tell them about any BNPL commitments early on in the process. By giving your broker the full picture, you can boost your chances of finding a suitable lender and getting approved for a mortgage.

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