What Is Buy Now Pay Later and What Does It Mean for My Mortgage Applications?

Written on 7 June 2022 by Nicholas Mendes

What Is Buy Now Pay Later and What Does It Mean for My Mortgage Applications?

What is Buy Now Pay Later?

Buy Now Pay Later (BNPL) schemes give you get the opportunity to buy something on credit without having to pay for it until a later date. This might be through regular interest-free instalments. Typically, this is over 3 instalments or after an interest-free period of 30 days.

This is becoming a common payment method at some high-street shops, but it’s more commonly used by catalogues and online retailers. Their products are often aimed at young people and families who may not have other forms of unsecured borrowing facilities such as credit cards.

The most common Buy Now Pay Later providers include Klarna, Clearpay and Laybuy. These companies offer a range of payment options.

How Do Lenders Assess Buy Now Pay Later When Arranging a Mortgage?

As part of a mortgage application, lenders will gather certain information to decide whether the borrowing requested will be affordable. For a decision in principle and mortgage application, this would typically include personal details, income, and expenditure.
Lenders will also perform a credit search (soft or hard), which will pick up any commitments you’ve currently applied for. Once this has been completed, a lender will come to a decision, taking into account all the information.

How BNPL commitments will affect your mortgage depends on several factors – the amount outstanding, how much you repay each month, and when the arrangements will be paid off.

Habits such as continuous loans, overdrafts, BNPL, and credit card minimum payments, could give an impression to the lender the applicant is too reliant on short-term credit. As a result, a reduced max borrowing amount could be provided, or a lender could decline the application as they feel the risk is to great with the extra expense that comes with being a homeowner.

Not all lenders allow you to input BNPL loans on a decision in principle, only at submission can this become an issue once a hard search is done. You could have a decision in principle but not until an application has been submitted and a hard search is done, are any BNPL commitments picked up resulting a revised decision. Being open and honest with the adviser is extremely important to avoid these issues.

Lenders make a distinction on short-term vs longer-term BNPL. Purchasing a £50 jacket that you choose to defer paying for 30 days, interest-free, is unlikely to scupper your mortgage as this will be paid back by the time your mortgage has completed. However, a £500 washing machine you have chosen to split into six payments would be a debt commitment that will impact how much spare cash you have each month and therefore will need to be taken more seriously.

Things to Consider

In the run up to looking at purchasing a property or remortgaging, think about your budget and track the amounts you are due to repay.

Ensure that all payments are made on time to avoid any late payments showing on your credit file and potential late fees charged by your BNPL provider. Whilst some BNPL options, such as Klarna don’t show on your credit file, others do.

The key thing to take into consideration if you’re going to be applying for a mortgage, either to purchase a property or re-mortgage your home, is that it’s best to avoid using payment plans, payday loans, or any other form of short-term finance for at least 6 months beforehand. Also, make sure you’ve either cleared any credit cards or are repaying the amount owed as quickly as you can, rather than just servicing the interest and minimum payment.

For any questions regarding BNPL or other issues you feel could complicate your mortgage application get in touch with us on 0330 433 2927.

Category: Nicholas Mendes