Does Afterpay affect your home loan application?

Afterpay is a payment option that has become increasingly popular over the years, with more Aussies opting to use this platform while buying essentials, gadgets, furniture and other products. Afterpay allows you to purchase whatever you want and then you can pay for that particular product in instalments.

When you create an Afterpay account, you need to link it to your debit or credit card. Depending on the product you purchase and the repayment option you choose, the system will deduct the amount from your account directly. While there is usually no interest charged, you will be charged a late fine if you miss a repayment.

When you apply for a loan, the lender will assess a few key things: your income, expenses and liabilities. A lender will want to know all about your spending habits and your debts to see how they may impact your ability to pay the mortgage. This is because they want to ensure that your budget can reasonably afford mortgage repayments, so any other debt is seen as a risk or a liability.

So while considering your application, most lenders will factor in every loan or debt you have, including small repeat payments like Afterpay, to ascertain whether or not you can afford to borrow money to buy a house.

BNPL purchases may also fall under your “regular ongoing expenses”. Meaning, if you make one or two purchases a month, a lender may assume you’ll continue to do this for the life of your loan, and reduce your borrowing capacity accordingly.

When applying for a home loan, one thing that lenders will assess right away is your credit score. At present, Afterpay doesn’t carry out a credit check nor does it charge any interest, simply applying for an Afterpay account may not have a negative impact on your overall credit score and home loan application. 

In the future, however, some changes are expected in the way Afterpay and other BNPL companies operate. The Australian BNPL industry would soon be subjected to the same rules and regulations as traditional credit providers. The National Consumer Credit Protection Act, which primarily focuses on safeguarding consumers, will be expanded to include BNPL companies as credit providers.

Under the updated Act, all BNPL providers will be required to obtain an Australian Credit Licence. They may also need to conduct credit checks on potential customers before granting approval. Once these regulations are implemented, applying for a BNPL loan may result in a hard inquiry being recorded on your credit report. At the same time, responsibly managing your BNPL payments might contribute to enhancing your credit score in the future. 

Besides impacting your credit score, there might be other ways in which using a BNPL service like Afterpay could impact your home loan application, such as:

Lenders consider all your expenses

Even though an Afterpay loan is typically a fairly small repayment amount, lenders will consider all your expenses while reviewing your home loan application. If you have too many sources of debt and borrow a considerable amount from Afterpay every month, lenders usually factor this into their assessment, as it directly impacts your ability to repay the mortgage.

It may look like you can’t manage your money and expenses

Most lenders will ask for your bank account statements to assess your income and expenses. If they notice that you need to pay Afterpay bills every month, or are late in repaying the amount and often pay penalty fees, lenders might get the perception that you’re not good at managing your money and it may be risky to lend you money.

Theoretically, having an Afterpay account doesn’t directly impact your credit history. Hence, closing your Afterpay account would most likely not impact your credit score. However, if you have too many on-going debts, some lenders may ask you to close the account.

Even if they don’t, you could consider closing it just to earn some brownie points with lenders, as it is one less expense to take into account while assessing your loan application.

On the other hand, if you don’t close your Afterpay account while applying for a loan, it helps if you’re upfront with lenders about how much you owe currently and your monthly repayments on an average. Not only can this increase your credibility, but it can also prevent any unnecessary delay in your loan application process.

Different lenders have different perceptions of Afterpay and its impact on your home loan application. You should consider comparing various lenders to find the one that suits your requirements. 

It’s also vital to stay on top of the regulatory changes in the BNPL industry. The federal government has already announced its intention of regulating BNPL under the National Credit Act. The amended legislation may be introduced by the end of the year, potentially leading BNPL companies to implement credit checks as part of the loan approval process. 

Additionally, they might be required to share customers’ payment history with credit bureaus, similar to other credit providers. The manner in which you manage your BNPL payments could directly impact your credit score.

Further, just as cancelling a credit card may reduce the available information for credit rating agencies, closing a responsibly used BNPL account may have a comparable effect in the future. To mitigate any potential negative impact on your home loan application resulting from BNPL usage, it’s advisable to refrain from signing up to multiple BNPL platforms, make your repayments on time and consider borrowing an amount you can comfortably afford to repay.