Navigating Mortgages with Buy Now, Pay Later (BNPL) Services: What You Need to Know
Understanding Buy Now, Pay Later (BNPL)
For many, Buy Now, Pay Later (BNPL) services such as Klarna, PayPal’s Pay in 3, and Clearpay have transformed the way purchases are made. With approximately 11 million users in the UK, these schemes enable consumers to make interest-free purchases and spread payments over time. However, the increasing prevalence of BNPL transactions raises questions about their impact on mortgage applications.
The Mortgage Application Challenge
In a recent exclusive survey, mortgage brokers revealed alarming trends regarding BNPL services and mortgage approvals. Even borrowers with a “perfect credit score” have faced rejections due to their BNPL usage. Here’s what brokers are observing:
- Impact on Approval: 67% of brokers noted that BNPL usage either played a direct role in or contributed to mortgage rejections.
- Frequent Use Concerns: Among those affected, 40% had “regularly” used BNPL services, with 21% being identified as “habitual” users.
- Higher Interest Rates: 27% of brokers reported that BNPL applications led clients to receive higher interest rates on their mortgages.
Case Studies: Real Stories from Brokers
Brokers share concerning anecdotes regarding BNPL and mortgage rejections:
- High Street Lender Rejections: One borrower was denied by four different lenders despite maintaining a perfect credit score due to a few BNPL transactions.
- Volume of Transactions: Another case highlighted a client who faced rejection after 33 deferred payments with Klarna within a single year, underscoring how even seemingly low-value purchases can add up.
A Call for Change
Brokers are urging lenders to reconsider their approach towards prospective borrowers who utilize BNPL services. As Jack Tutton, a director at SJ Mortgages, pointed out, “Lenders need to take these repayments seriously as they reflect a borrowing pattern, even if the amounts are small.”
Understanding Credit Reporting
While BNPL companies do not perform hard credit checks, they do share payment data with credit agencies. This means:
- Positive Effects: Timely payments could reflect well on a credit report.
- Negative Effects: Missed or late payments could harm credit standing.
Mixed Reactions from BNPL Companies
In response to the survey, major BNPL service providers defended their practices. Klarna argued that regular, successfully completed transactions indicate good money management, thereby enhancing a consumer’s attractiveness to lenders. Clearpay echoed this sentiment, emphasizing that the vast majority of transactions are paid on time.
Insights from Lenders
The approach to BNPL by lenders varies significantly:
- Nationwide: Does not see much BNPL activity affecting their lending.
- Yorkshire Building Society: Will consider BNPL usage only if there are other signs of financial distress.
- Santander: Views BNPL payments as outstanding debts, which might limit borrowing capacities.
How to Improve Your Mortgage Chances with BNPL
If you frequently use BNPL services but worry about your mortgage application, here are key steps to enhance your approval chances:
1. Review Your Credit Report
Make sure to check your credit report with major agencies for any missed payments or negative records. Clearing up any discrepancies before applying can be beneficial.
2. Manage Your Finances
Reassess your monthly budgeting. If there are unnecessary outgoings, consider reducing them to improve your affordability assessment.
3. Use BNPL Responsibly
Occasional and sensible use of BNPL shouldn’t negatively impact your mortgage prospects, especially with timely repayments.
Conclusion: A Forward Path
The rise of BNPL services presents unique challenges and opportunities for borrowers. Despite reported difficulties, frequent users can take proactive steps to ensure they remain attractive to lenders. As the financial landscape evolves, staying informed and adjusting habits will be crucial for potential homeowners.
For more up-to-date tips and insights on managing your finances and preparing for homeownership, visit our Money blog today!
