Are you tempted to use a ‘buy now pay later service’ such as Afterpay, Zippay, Humm and the like? Think again if you want to buy property in 2020. Here’s why.
What is buy now pay later (BNPL)?
Buy now pay later is the term used to refer to interest-free credit which allows you to spread the cost of your purchases over a set amount of time, rather than paying for your items upfront.
Over the Christmas period, it is an attractive option for many shoppers, so much so that many people are cutting up their credit cards in favour of this shopping solution.
How does BPNL work?
BNPL works much like layby, but instead of receiving your goods once you’ve paid for them, you receive your goods right away. There is actually a new BNPL service named “Laybuy”.
BPNL providers make most of their money by charging retailers a fee per transaction. Late payment fees are another way they make money and is also the way some people find themselves in a debt spiral if they don’t pay on time.
Should I use BNPL services?
If you don’t have the cash to pay for your Christmas goodies upfront, you might be tempted to use a buy now pay later service. Even if you do have the cash but would rather hang on to it and use the convenient repayment options, that convenience could cost you dearly if you are planning to buy property in 2020.
Since the financial royal commission, lenders are taking a more detailed approach when investigating home loan applications. BNPL platforms are red flags to lenders because it is viewed as an ongoing expense. Lenders also assume that you have no disposable income and are buying items you can’t afford, which obviously doesn’t look great on a loan application.
For first home buyers, I recommend that you stay away from BNPL services altogether. There is a chance that your borrowing capacity could be reduced or worst-case, your loan could be knocked back because you are or have used BNPL.
What if I already have a BNPL agreement?
If you already have a BNPL agreement (e.g. Afterpay, ZipPay, Humm etc), and you know you are applying for a mortgage in the next three months, pay it out as quickly as you can and stop using these credit facilities. You will have to prove to the bank that the account is inactive and perhaps declare that your cash flow is viable.
Some banks want proof that the account has been closed, which is unfortunate because it can be difficult to close a BNPL account once you have one set up.
So, Buy Now Pay Later is convenient for Christmas shoppers but as you can see, it can be extremely inconvenient if you want to buy property in 2020.