I’m considering using “buy now, pay later,” but what exactly is it and will it affect my mortgage application if I buy a home later this year? RQ
Lenders must make responsible decisions about whether borrowers can afford a mortgage
MailOnline’s real estate expert Myra Butterworth said: Borrowers who are financially overwhelmed can be a red flag to lenders as they risk not being able to pay off their mortgage.
Heavy use of “buy now, pay later” programs can indicate to a lender that this is the case and that the borrower is struggling to manage their finances.
A lender must make a responsible decision about whether a borrower can afford the mortgage before approving it.
While some forms of buy-now-later borrowing still don’t show up on a borrower’s loan file and affect their credit score, lenders can still see evidence of it on their bank statements, so it could still affect the mortgage application.
Additionally, starting June 1, Klarna will begin reporting customer borrowing and late payments to credit bureaus.
Borrowers need to keep this in mind if they want to present the best financial version of themselves to secure their home loan and proceed with the property purchase.
Nicholas Mendes of mortgage broker John Charcol said: Buy now, pay later programs provide an opportunity to buy something on credit without having to pay for it later.
This can be done through regular interest-free installments. Typically, this is done over three installments or after an interest-free period of 30 days.
It’s used as a payment method in some high street shops, but it’s more commonly used by catalogs and online retailers.
Their products may target young people and families who may not have other forms of unsecured credit such as credit cards.
The most common Buy It Now Later providers include Klarna, Clearpay and Laybuy. These companies offer a range of payment options.
Buy now, pay later programs provide an opportunity to buy something on credit without having to pay for it later
Effects on a Mortgage Application
As part of a mortgage application, lenders gather certain information to determine if the borrowing requested will be affordable.
For a fundamental decision and mortgage application, these are typically personal data, income and expenses.
Lenders also run a loan search — soft or hard — that picks up any commitments you currently have applied for.
Once this is completed, a lender will come to a decision considering all the information.
How “buy now, pay later” obligations affect a mortgage depends on several factors — the amount outstanding, how much you pay back each month, and when the agreements are repaid.
Habits such as term loans, overdrafts, buy it now, pay later, and credit card minimum payments might give the lender the impression that the applicant is over-reliant on short-term credit.
As a result, a reduced maximum loan amount could be provided, or a lender could decline the application, believing the risk with the additional costs that come with owning a home is too great.
Not all lenders allow you to enter Buy Now Pay Later Loans in principle, only at the time of filing this can become a problem once a thorough search has been conducted.
You could make a decision in principle, but only after filing an application and doing a thorough search will all of the “buy now, pay later” obligations be considered, resulting in a revised decision.
Lenders distinguish between short-term and longer-term buy-it-now, pay later.
Purchasing a smaller item, such as a A £60 coat, for example, which you choose for a 30-day interest-free payment deferral, is unlikely to jeopardize your mortgage as it will be repaid by the time your mortgage is finalised.
But a more expensive item, such as A £900 fridge, for example, split into six payments would be a debt obligation, impacting how much money you have left over each month and therefore needing to be taken more seriously.
As with credit cards at zero percent for at least 24 months, lenders could end up taking 1.5 percent of the balance as a monthly commitment. But no lender has yet set formal criteria for this.
things to consider
Before you buy a property or refinance, think about your budget and keep track of the amounts you have to pay back.
Make sure all payments are made on time to avoid late payments showing up on your credit file and potential late charges from your “buy now, pay later” provider.
While some buy now, pay later options, such as B. Klarna, do not show up in your credit file, others do.
The most important thing to consider when applying for a mortgage, either to buy a property or to remortgage your home, is that it’s best to avoid payment plans, payday loans, or other forms of short-term financing for at least six months in advance.
Also, make sure you either clear all credit cards or repay the amount owed as soon as possible instead of just servicing the interest and minimum payment.