Buy now pay later can be the kiss of death for first home buyers, mortgage brokers have warned.
Multiple companies including Afterpay NZ, Zip, Genoapay, Laybuy, humm, and Sweden’s Klarna offer deals that allow customers the instant gratification of buying goods now and paying them off in interest-free instalments over a fixed number of weeks on payment plans.
One of the most asked for questions about it on Google NZ is, “Is Afterpay bad for your credit?”. The answer can be yes when it comes to home loans.
The first time a bank queried her client’s use of buy now pay later (BNPL), Loan Market mortgage adviser Lisa Meredith was taken aback. “They were probably only a couple of $100 Afterpays and the (bank employee) goes, ‘You know that’s evidence they’re not managing their money well’.”
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Other colleagues in her office have seen banks add BNPL to their lending criteria, and have seen client get turned down based on the number of BNPL deals showing on their bank statements.
From the banks' perspective they are exercising due diligence to ensure clients can afford the loan. If they see a $200 a week payment in an applicant's account history, they will mark it as an ongoing expense, arguing that the applicant will continue to use buy now pay later services in the future.
The banks see it as reflective of a borrower’s financial character. In some ways, they’re not wrong, says Jeff Royle, an adviser at iLender. “If you’re paying $500 for something and you can’t afford [cash], how can you then afford a $400,000 or $500,000 mortgage?”
Don’t gamble, don’t drink, don’t Afterpay
Young borrowers often prefer BNPL to high cost loans and credit cards, and interest free makes it feel virtuous. On TradeMe, one of the better known Afterpay stores, it takes seconds to apply. Buyers can even purchase 50c items on Afterpay from TradeMe. That’s four interest-free payments of 13c each plus shipping.
The ease of signing up encourages clients to spend more freely, but they don’t always consider the effect it might have on getting home loans.
Some clients have said it’s their “right” to borrow money. “That’s not how the banks look at it,” says Meredith.
She and her colleagues have had to add “don’t get BNPL” warnings to clients alongside “don’t go to the casino” and “don’t go to the bottle shop after work if you want a mortgage” messages.
CCCFA changes
The scrutiny is only going to tighten with new minimum standards for assessment of borrowers’ ability to repay loans from next month, when changes to the Credit Contract and Consumer Finance Act 2003 (CCCFA) come into effect.
The banks are already digging deep in general, says Meredith. One bank queried $15 and $20 babysitting payments on a client’s account. “That’s the level of scrutiny,” she says.
Banks look at applicants' spending history when assessing their risk profile. Photo / Getty Images
Royle says thanks to those CCCFA changes, banks will be scrutinising existing spending habits even more carefully and questioning clients’ future spending to ensure compliance with the CCCFA. “These new rules are bordering on invasion of privacy,” he says.
A single BNPL isn’t going to ruin borrowers’ chances of getting a mortgage, says Royle. “They won’t see [Afterpay] as a scourge until the bank sees you used it here, here, here, and here (and then it’s) ‘very sorry, you can’t borrow $500,000’.”
Credit scores
Home buyers who want to borrow to buy a home should close off all BNPL accounts along with any high cost consumer credit at least three months before applying for the mortgage . Banks don’t tend to go back further, although BNPLs will show up on borrowers credit records usually.
Royle says not long ago one BNPL provider took an advertisement claiming its product wouldn’t impact borrowers’ ability to get a mortgage. But under the new CCCFA rules it can. The largest BNPL player Afterpay that it doesn’t do credit checks or report late payments to credit bureaus.
Yet how borrowers behave with BNPL does affect their credit worthiness, says Keith McLaughlin, managing director of the Centrix credit bureau. It shows up regularly in credit bureau data.
McLaughlin says most BNPL providers use credit data and scores to assess the risk of their clients. The BNPL providers share clients’ payment behaviour with Centrix through comprehensive credit information. “This in turn means that data relating to consumer payment behaviour is available to other Centrix Bureau members (such as banks).”
On a positive note, says McLaughlin many young BNPL users create their first credit profile with BNPL and this if treated appropriately does set them up with a favourable credit record.
More control on the way
While BNPL isn’t regulated currently, Simpson Grierson partner Andrew Harkness says BNPL schemes are unlikely to remain unregulated. “The current Minister of Commerce and Consumer Affairs, David Clark, has expressed his intention to use his CCCFA regulatory power to capture BNPL schemes - but only after giving the industry a chance to self-regulate, a chance that does not at this stage appear to have been taken up,” Harkness wrote in May. “Watch this space.”
Meanwhile the Ministry of Business Innovation and Employment (MBIE) does have BNPL in its sights and first reported on it to former Minister of Building and Housing Kris Faafoi. MBIE noted in a report to Faafoi released under the Official Information Act that there is increasing evidence of consumer harm arising from the use of BNPL products.
