By Christopher Zinn, Life Sherpa
Credit is an ambiguous word. It can apply both to a ‘pat on the back’ for something done well and a good or service advanced before payment based on the seller’s trust that you will cough up.
It’s also a battleground around the Buy Now Pay Later revolution, whose critics claim it is a credit wolf in sheep’s clothing cunningly designed to avoid the scrutiny of regulators and consumer protection legislation.
But BNPL providers say they are clearly a platform designed to assist merchants in selling more to more customers and so should not attract the same regulatory attention as credit cards and personal loans do. The ability to smooth payments has proven very popular with shoppers
However, there has been media reports recently of banks requiring first-time homebuyers in search of a home loan to close any BNPL accounts.
In Australia, the two market leaders Afterpay and Zip Pay have claimed the banks are interfering with their products by demanding customers close all their BNPL accounts to get a home loan approval.
“ (Banks) understand the customer can afford the mortgage,” Zip’s Peter Gray told a parliamentary inquiry. “To then impose a restriction on them in continuing to …engage with a BNPL provider they probably need to disclose why they’re going that.”
So, the answer to the question of what impact it has on your likelihood of scoring a home loan is unambiguously ‘yes’. If it should or not, is a different question. Arguably it shouldn’t because BNPL is not categorised as a credit product in Australia (largely because the consumer pays no more than the cash price) and so might not be expected to impact your credit score.
To reiterate, Afterpay and other BNPL schemes are not credit facilities, under Australian Law and so don’t show up on your Comprehensive Credit Reporting (CCR) file. In extreme cases, a default on a large payment to a BNPL platform resulting in a court judgement would appear and so impact your credit score.
So, it may be easier for consumers to simply close their BNPL accounts prior to applying for a home loan accounts, and so avoid additional scrutiny of their spending habits, here are some more basic steps to help you secure that home loan.
- Check your credit report
It’s worth doing and is usually free. Check the personal details and any queries on your credit history are correct. You can question mistakes but beware of credit repair companies who claim to improve your score. They can be ineffective and expensive at best and rip-offs at worst.
- Close unused credit cards.
When a lender assesses your loan application, they generally work on the assumption that your credit limits are fully drawn and count the minimum payment as an expense. A $5,000 extra on your card’s limit could reduce your borrowing capacity by $21,000
- Reduce or end credit applications
Think twice about applying for credit in the year leading up to your mortgage application. Do it well in advance if you intend to use 0% balance transfer offers to reduce your debts. If you want to take advantage of ‘interest-free’ loans from furniture providers, wait until after your loan has settled.
- Stay put
Moving houses or jobs frequently can create issues in getting a loan approved. Banks like to see stability – at least six months in a position and any probation period completed.
BNPL schemes have clearly eaten into the market share enjoyed by credit card issuers by offering a competitive and less risky way to secure goods and services before paying for them upfront. There is clearly no love lost between them.
The bank’s effective and alleged threats to BNPL customers to tear up their contracts may not be fair or even legal but they could affect your chances of a home loan. You be the judge.
Christopher Zinn is a personal finance expert at Life Sherpa. He works to replace the myths and mysteries we can all feel around money with more constructive beliefs. He believes that empowering consumers with reliable and understandable advice and information they can implement now makes life’s goals more achievable. Due to his varied and deep journalistic experience, Christopher is a media commentator and authority on consumer affairs. An in-demand creative, he writes regular blogs and op-eds and has lectured and published on young people and consumerism.LinkedIn: https://au.linkedin.com/in/chzinn
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