The Buy Now Pay Later (BNPL) sector is winning-over the youth demographic with the promise of instant gratification. However leading mortgage brokers are warning that with every sugar-high comes the risk of a corresponding low.
‘Buy Now Pay Later’ providers such as AfterPay, Zip Pay and Pay It Later have experienced massive growth in popularity. The number of users jumped from 400,000 to approximately 2 million between 2015 and 2018 and have continued to rise. With COVID, many more shops have signed up in an attempt to persuade more buyers to spend with them.
Driven by a simple proposition whereby the BNPL provider pays the merchant, allowing the customer to obtain the goods or receive a service immediately while subsequently paying off the debt generally through instalments, Buy Now Pay Later presents a tempting offering. However, this is no different to using a credit card – with less governance!
But as the sector’s breakneck growth continues, mortgage professionals are warning users – particularly in the younger demographic – to be cautious of overdoing it as this could risk affecting their chances of securing a home loan further down the track. “It’s the layby of our day but in reverse. It’s your forward credit for an item, which I don’t agree with,” said one leading mortgage broker.
In theory it makes sense. A consumer gets the item or service and pays it off over instalments, so they’re actually pushing forward the liability. In some cases it means paying a higher interest rate than a credit card with additional monthly fees. This might be OK for someone that manages their money well, if they pay off the item on time and use their mortgage offset account correctly. This way they are delaying the expense and offsetting more of their savings against their home loan.
However there’s probably one per cent of people doing that and the rest are spending beyond their means. As a result, there may be a stigma associated with using BNPL schemes rather than paying up-front or using a fully vetted personal loan from an established lender. Utilising a Buy Now Pay Later method may send the wrong message to a bank. If a lender sees many BNPL transactions showing frequently on a client’s bank statements, that will trigger more questions about their spending behaviours. Ultimately this may mean the bank chooses to decline the application.
We would much prefer to see our clients save for smaller value items, utilise personal loans for bigger purchases and demonstrate good financial habits. If you are concerned about your level of expenditure or your ability to secure a home loan, a conversation with Astute St Leonards could set you on the right path.
It’s important to appropriately manage your expenses well in advance of applying for a home loan. That way you can show that you can save and afford to service a mortgage when the time comes.