ANALYSIS: Earlier this month, Apple announced their new iOS16 operating system and a small change to their contactless payment service Apple Pay. That change could have massive changes for mortgage applicants when it arrives here in New Zealand.
At the moment, Apple Pay is available to use in New Zealand anywhere where contactless payment is accepted and using Apple Pay doesn’t affect your chances of getting a mortgage any more or less than using an EFTPOS card. It’s simply another way to pay for an item.
However, in the latest update, due out later this year, Apple has introduced their version of a Buy Now Pay Later service called Apple Pay Later. This effectively allows you to spread costs from a purchase over four equal payments with 0% interest and fees over four months.
Believe it or not, Buy Now Pay Later (BNPL) schemes do have a place in the world. Imagine an example where a new tradesperson can complete a job over the space of a week that will make him $1000 in profit. However, he needs to purchase a tool that costs $500 to complete the job. Using a BNPL lender, he can buy the tool and finish the job. He’ll have made a $500 profit and still have the tool for other jobs in the future.
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In New Zealand, BNPL services are often used for big-ticket items. Whether or not these are a good idea is an entirely separate discussion. They have low-interest rates and fees but often encourage people to purchase items they don’t have the money for, sometimes stretching family budgets beyond what is comfortable.
When applying for a mortgage, banks have a variety of ways they deal with BNPL payments. Most take your current regular payments and assume you will continue to pay those throughout your mortgage. They recognise that BNPL payment plans usually only go for a month or two, but the banks assume that you are approved for this amount of lending, so once you have finished your payments for that item, you will purchase something new.
Some banks have a slightly more lenient policy for completed BNPL payments. If you can show you have paid off the loan and have closed your account, they may exclude the payments from your usual expenses. Mortgage applications require three months of bank statements. To show the banks you are no longer using the BNPL service, you would want to show them at least two months without any payments going to the lender.
Mortgage Lab CEO Rupert Gough: "If you’re looking to buy a property, the best strategy to follow is to avoid secondary debt altogether." Photo / Fiona Goodall
The introduction of Apple Pay Layer, an on-call BNPL service available at literally any paywave-enabled terminal, should raise some concerns, though. Maybe you’ve budgeted yourself three takeaway coffees a week but walking passed the local cafe, you convince yourself that an extra $5 coffee with payments spread over four months won’t kill the budget. The next day, the same thing happens but maybe an extra scone. After all, the scone is just $1.25 per month over four months.
It doesn’t take much to see budgets quickly getting overwhelmed on small purchase items. Where once the services were used for intentional purchases of one-off big-ticket items, with Apple Pay Later, your budget faces death by a thousand cuts. It is very plausible that the temptation caused by this could lead people to waking up one month facing thousands of dollars of delayed purchase payments, torpedoing their ability to get onto the property ladder.
Some might argue that the service is no different to a Credit Card. You borrow money that is required to be paid back later. This is slightly true, except that Credit Cards usually have a minimum payment of 3%-5% of the outstanding amount per month, whereas Apple Pay Later has a minimum payment of 25% per month. While Pay Later has a 0% interest charge, obviously better than most Credit Cards, the effect on your cash flow and, therefore, your ability to borrow a mortgage is much higher.
If you’re looking to buy a property, the best strategy to follow is to avoid secondary debt altogether. Get rid of all Credit Cards, don’t make use of BNPL services and when Apple inevitably releases Apple Pay Later in New Zealand in the future, switch it off in the settings of your phone.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
