Why 'buy now pay later' could cost you a mortgage

Key Concepts

• Buy Now Pay Later (BNPL): A payment method allowing consumers to purchase items and pay for them in interest-free installments.
• Credit Agencies: Organizations that collect and maintain credit information on individuals, used by lenders to assess creditworthiness.
• Credit File: A record of an individual's credit history, including payment behavior, debts, and credit inquiries.
• Mortgage Lender: A financial institution that provides loans for the purchase of real estate.
• High Street Lender: Traditional banks and financial institutions offering mortgages.
• BNPL Reporting: The practice of some BNPL services reporting payment data to credit agencies.
• Red Flags: Indicators that raise concerns for lenders regarding a borrower's financial stability.
• Proportionate Assessment: Lenders evaluating BNPL usage in a manner that reflects its actual risk and the customer's overall financial situation.

Impact of Buy Now Pay Later on Mortgage Applications

This section details how the use of Buy Now Pay Later (BNPL) services can negatively affect an individual's ability to secure a mortgage.

• Reporting to Credit Agencies: While BNPL services are often perceived as interest-free installment plans, some report payment data to credit agencies. This data forms part of an individual's credit file, which is a crucial document for banks when assessing mortgage applications.
• Lender Scrutiny: Even if a lender does not directly access the credit file, a high volume of BNPL transactions appearing on bank statements can raise concerns and be considered "red flags."
• Broker Survey Findings: A survey of mortgage brokers revealed that 67% had encountered clients rejected by high street lenders specifically due to their BNPL habits. This highlights a significant real-world impact.
• Prevalence of BNPL Use: Conversely, 40% of brokers reported that their clients regularly used services like Klarna or PayPal's "Pay in 3." This suggests that occasional and sensible use of BNPL is common and may not necessarily be detrimental.

Responses from BNPL Providers

This section outlines the perspectives and defenses offered by major BNPL providers in response to concerns about their impact on mortgage applications.

• Klarna's Stance: Klarna asserts that they provide innovative financial services and that the rest of the financial industry should adapt. They directly challenge the notion that using Klarna prevents mortgage approval, with a statement attributed to them: "If a mortgage broker tells you that using Klarna means you won't get a mortgage, find a different broker."
• Lender Perspective: Lenders have indicated that they view healthy, short-term, interest-free BNPL usage as a normal component of modern financial management. They believe that when used responsibly, BNPL can be neutral or even beneficial to mortgage prospects.
• Clearpay's Position: Clearpay describes BNPL as an "everyday payment for millions of people looking for innovative financial products." They highlight that 95% of their transactions are paid on time, indicating a high level of responsible usage. Clearpay expects lenders to assess BNPL usage "in a proportionate manner that is reflective of the risk of the product and the overall financial profile of the customer." They are also working to ensure BNPL data is used "fairly in credit decisioning."
• PayPal's Silence: PayPal was contacted for comment on multiple occasions but did not provide a response.

Strategies to Mitigate Negative BNPL Impact on Mortgages

This section provides actionable advice for consumers to avoid potential negative consequences of BNPL usage on their mortgage applications.

• Payment Diligence: Make all BNPL payments on time and ensure they are up to date. This is a fundamental step in maintaining a good credit record.
• Credit Report Monitoring: Regularly check your credit report with the major credit reference agencies. This allows you to identify any inaccuracies or negative entries.
• Consult Mortgage Advisor: If you find any negative records on your credit report, flag them immediately with your mortgage advisor.
• Budget Review and Debt Reduction: Review your monthly budget to identify and clear any unnecessary credit arrangements. This can free up borrowing capacity and improve your overall financial profile.
• Expert Resources: Further expert tips and strategies for improving mortgage chances can be found on the money blog.

Conclusion

The use of Buy Now Pay Later services presents a dual-edged sword for consumers seeking mortgages. While offering convenience and interest-free installments, some BNPL providers report payment data to credit agencies, which can lead to mortgage rejections. A significant percentage of mortgage brokers have witnessed such rejections due to clients' BNPL habits. However, BNPL providers like Klarna and Clearpay argue that their services are innovative and that responsible usage should be viewed as normal financial behavior by lenders. They emphasize that proportionate assessment of BNPL data is crucial. To safeguard mortgage prospects, consumers are advised to prioritize timely payments, monitor their credit reports, and manage their overall debt responsibly.