Buy Now Pay Later

Are buy now pay later schemes affecting the ability of people to get a mortgage?

Buy now pay later (BNPL) has seen exponential growth over the last decade with financing a purchase becoming increasingly easy and increasingly normal. While BNPL has been around for many years, recent years have seen an increased availability of BNPL for relatively low value goods which has drawn considerable media attention and sparked important debate. In this blog we will discuss what are BNPL agreements and what effect they can have on your ability to get a mortgage.

Firstly, this is by no means an attack on the principle of BNPL. After all, a mortgage is a sophisticated “buy now, pay later” contract to purchase a house!

A BNPL agreement is effectively an unsecured loan taken to purchase an item. The advantage of BNPL is that it spreads the cost of a purchase which eases cash flow as the whole amount is not required upfront. BNPL agreements are often interest-free too. Many online retailers offer BNPL options through companies such as Klarna, Clearpay and PayPal – major players in the market. BNPL works by the provider paying the retailer on the customers behalf. The customer then has a formal credit agreement to repay the BNPL lender.

When applying for a mortgage, lenders run an affordability calculation based on your income and expenses to determine the amount they will lend to you. Having a high level of expenditure reduces the amount you can borrow relative to your income. As discussed, given BNPL agreements are effectively unsecured loans, they are treated as such by mortgage lenders and they will generally reduce the mortgage you would have otherwise been eligible for. The knock-on effect of this is obviously your budget is reduced when buying a house.

As BNPL is a formal credit agreement, it’s worth noting that a significant number of applications for credit in a short period of time does not reflect well on a mortgage application. Lenders internal credit scoring systems will pick up applications for credit and it can lead to a decline if severe enough. Equally crucial is understanding the importance of paying a BNPL agreement as with any other formal credit agreement. All payments are recorded on your credit file which is viewed by lenders when applying for loans, mortgages and credit cards in the future. BNPL on low value goods is becoming increasingly targeted towards young people as they represent the largest proportion of online shoppers. Unfortunately, young people are generally less likely to have a thorough grasp of the significance of a credit agreement and the potential repercussions of missing payments, short-term and long-term. No national curriculum education on personal finance means these are lessons people often find out the hard way…

A single late payment to Klarna on a £25 top from H&M could stop you getting a mortgage with some banks for up to two years.

BNPL lenders often put forward the argument that BNPL is a modern alternative to a credit card. However, this ignores the majority of credit card users who are not spending any differently to if they were using a debit card and clear the balance in full each month. Most people using a credit card are doing so for the increased consumer protection, cashback benefits and improved credit rating, not to spread the cost of items, they otherwise wouldn’t be able to afford, over time.

In many cases, BNPL is used to purchase items people simply would not have purchased before the advent of BNPL. Is this a positive? Is this an example of how a new concept can improve people’s lives or is it causing more damage than good? Should it only be available on certain types of purchase?